BlogNISM Series XB Investment Advi...Chapter 5: Retirement Products

Chapter 5: Retirement Products

Accumulation Related Products for Retirement Planning

In the accumulation stage of retirement planning, an individual has various products available to generate their retirement corpus. While some products are mandatory, others are voluntary. One of the most popular mandatory retirement savings schemes in India is the Employees’ Provident Fund (EPF). In this section, we will discuss EPF and its various aspects.

Employees’ Provident Fund:

EPF is a mandatory savings cum retirement scheme for employees of an eligible organization. It is intended to be a retirement corpus. As per the EPF norm, employees must contribute 12% of their basic pay plus dearness allowance every month. A matching amount is contributed by the employer as well. The amount deposited in EPF accounts earns interest on an annual basis.

Monthly Contribution:
Both the employer and employee have an equal contribution towards the employee’s provident fund. The actual amount of EPF contribution is calculated based on the employee’s basic salary and dearness allowance. The employer deducts 12% of the employee’s salary (basic + dearness allowance) directly every month for a contribution towards EPF. This entire contribution goes to the EPF account of the employee. Similarly, the employer also contributes 12% of the employee’s salary towards EPF.

Category Percentage of contribution
Employees Provident Fund 3.67%
Employees’ Pension Scheme (EPS) 8.33%
Employee’s Deposit Link Insurance Scheme (EDLIS) 0.5%
EPF Admin Charges 1.1%
EDLIS Admin Charges 0.01%

The EPF contribution can be 10% in certain circumstances, such as if a company has less than 20 employees, incurs losses more than its entire net worth, or is associated with beedi, jute, brick, guar gum, or coir industry. The contribution can also vary in case of women employees. As per the announcement in the Union Budget 2018-2019, new women employees can make an EPF contribution of 8% instead of 12%.

Interest Rate:
Interest rate is pre-decided by the Government of India (GOI) along with the Central Board of Trustees (CBT). The interest rate which is announced by GOI stays valid for a financial year, i.e. starting from 1st April to 31st March. This interest is calculated every month and then transferred to the Employee Provident Fund accounts every year on 31st March. The interest earned on EPF is exempted from tax within certain limits. However, effective from April 1, 2021, if an employee’s own contribution to the EPF account along with VPF exceeds Rs 2.5 lakh in a financial year, then the interest earned on excess contributions will be taxable in the hands of an employee.

EPF Balance Withdrawal:

EPF balance withdrawal can be done entirely or partially.

Complete Withdrawal:

  • Complete withdrawal of EPF balance is allowed when an individual retires or remains unemployed for more than two months.
  • Withdrawal during the interim period between changing jobs is against the PF rules and regulations.

Partial Withdrawal:

  • Partial withdrawal of EPF balance can be made under certain circumstances and subject to prescribed conditions.
  • Withdrawal limit and other conditions vary based on the reason for withdrawal.
  • The following are the circumstances where partial withdrawal is allowed:
    1. Medical purposes
    2. Marriage
    3. Education
    4. Purchase of land or purchase/construction of a house
    5. Home loan repayment
    6. House renovation
    7. Partial withdrawal before retirement
    8. Partial withdrawal due to ‘Outbreak of pandemic (COVID-19)’

EPF balance Withdrawal

Sl. No. Particulars of reasons for withdrawal Limit for withdrawal No. of years of service required Other conditions
1 Medical purposes 6 months basic salary and dearness allowance Or total employee’s share plus interest, whichever is lower No criteria Medical treatment of self, spouse, children, or parents
2 Marriage Up to 50% of employee’s share of contribution to EPF with interest 7 years For the marriage of self, son/daughter, and brother/sister
3 Education Up to 50% of employee’s share of contribution to EPF with interest 7 years Either for account holder’s education or child’s education (post matriculation)
4 Purchase of land or purchase/construction of a house For land – Up to 24 months basic salary plus dearness allowance, For house – Up to 36 months basic salary plus dearness allowance Or Total of employee and employer share with interest Or Total Cost, Whichever is least. 5 years i. The asset, i.e. land or the house should be in the name of the employee or jointly with the spouse. ii. It can be withdrawn just once for this purpose during the entire service. iii. The construction should begin within 6 months and must be completed within 12 months from the last withdrawn installment.
5 Home loan repayment Least of below: Up to 36 months basic salary plus dearness allowance Or Total corpus consisting of employer and employee’s contribution with interest Or Total outstanding principal and interest on housing loan 10 years i. The property should be registered in the name of the employee or spouse or jointly with the spouse. ii. Withdrawal permitted subject to furnishing of requisite documents as stated by the EPFO relating to the housing loan availed. iii. The accumulation in the member’s PF account (or together with the spouse), including the interest, has to be more than Rs 20,000.
6 House renovation Least of the below: Up to 12 months basic wages and dearness allowance Or Employee’s contribution with interest Or Total cost 5 years i. The property should be registered in the name of the employee or spouse or jointly held with the spouse. ii. The facility can be availed twice: a. After 5 years of the completion of the house b. After the 10 years of the completion of the house

Tax Implications of EPF Contributions and Withdrawals

EPF contributions and withdrawals have tax implications that individuals should be aware of to avoid any tax-related issues. Here are some key points to keep in mind:

Table: Tax Implications of EPF Contributions and Withdrawals

Type of Contribution/Withdrawal Tax Implications
Employee Contribution to EPF Eligible for deduction under section 80C. Interest earned on contributions is exempted up to Rs. 2.5 lakhs per annum. Any interest earned on contributions exceeding Rs. 2.5 lakhs per annum is taxable.
Employer Contribution to EPF Tax-exempted up to a certain limit. If aggregate contributions to EPF, NPS, and superannuation fund exceed Rs. 7.5 lakhs in a financial year, excess amount is treated as perquisite and taxed in the hands of the employee.
EPF Withdrawal before 5 years Taxable in the year of receipt, except in cases of employee ill-health, employer discontinuing its business, or any other reason beyond the employee’s control. If EPF balance is transferred to new employer, it remains tax-free.
EPF Withdrawal after 5 years Tax-free in the year of receipt.
EPF Withdrawal < Rs. 50,000 before 5 years Taxable if individual falls in the taxable bracket.
EPF Withdrawal > Rs. 50,000 before 5 years TDS

Voluntary Provident Fund (VPF)

The Voluntary Provident Fund (VPF) is a voluntary scheme that allows employees covered under the Employee Provident Fund (EPF) to invest over and above the mandatory 12% of their basic and dearness allowance.

Topic Details
Introduction VPF allows EPF covered employees to invest over and above mandatory 12% of basic salary.
Investment Limits Subscriber can invest up to 100% of basic salary and discontinue with prescribed notice.
Return Annually declared by government, predominantly in debt investments.
Tenure and Withdrawals Open-ended, contributions can be made until retirement, withdrawal according to EPF rules.
Taxation Exempt from tax up to a specified limit. Interest earned on excess amount above Rs. 2.5 lakhs is taxable.

Public Provident Fund

Public Provident Fund (PPF) is a long-term savings scheme that helps individuals accumulate funds for retirement and other goals. It is a popular savings product in India and can be opened with prescribed banks and post offices.

Eligibility Criteria:

  • Only Indian residents are eligible to open a PPF account.
  • NRIs are not eligible to open PPF accounts but can continue their account until maturity if they have opened it before becoming an NRI.
  • Parents/guardians can open PPF accounts for their minor children.
  • Joint accounts and multiple accounts are not allowed.

Key Features:

  • Lock-in period: A PPF account has a fixed-income, long-term investment with a lock-in period of 15 years. Premature withdrawals are allowed after 5 years subject to certain limits. This tenure can be extended in blocks of 5 years at the end of the first 15 year lock-in period.
  • Minimum and maximum investments: Individuals need to make a minimum investment of Rs. 500 annually. A maximum investment of Rs. 1.5 lakh can be made in one year in a PPF account.
  • Taxation: PPF comes under the Exempt-Exempt-Exempt (EEE) category of tax policy which implies that the principal amount is allowed as a deduction under section 80C, the interest earned and the maturity amount are exempt from taxes.
  • Loan against PPF: A PPF account holder can take a loan against the balance from the beginning of the 3rd financial year till the end of the 6th year from the date of account opening.

Interest Rate:
PPF is a floating rate investment, and the interest rate on PPF accounts is notified by the central government every quarter.

Withdrawals:
PPF works under a mandatory lock-in period of 15 years. However, partial withdrawals from the account can be made after the completion of the 5th financial year from the year in which the account is opened. Only one partial withdrawal is allowed per financial year, and the maximum amount that can be withdrawn per financial year is the lower of the following:

  • 50% of the account balance as at the end of the preceding year, or
  • 50% of the account balance as at the end of the 4th year, immediately preceding the year of withdrawal.
    Form-2 should be submitted to withdraw a partial amount from the PPF account.

Extension of Account Tenure:
PPF account matures after 15 years from the end of the financial year in which the account was opened. At the time of maturity, the account holder has the option to extend the tenure in blocks of 5 years:

  • Extension of PPF with contribution: A subscriber can extend the life of the PPF account indefinitely in blocks of 5 years at a time by submitting Form-4 with further contributions.
  • Extension of PPF without further contribution: If no choice is made, then the default choice, i.e., extension without further contribution applies.

Taxation:

  • Public Provident Fund falls under EEE (i.e. exempt-exempt-exempt) regime of taxation.
  • Contribution to the account (up to Rs 1.5 lakh per annum) is eligible for deduction under section 80C of the Income Tax Act. Interest earned and maturity proceeds are also exempt from tax. However, the interest earned must be declared on the income tax return.

Note:

PPF is a popular savings product in India, and individuals can accumulate funds for their retirement and other goals. The scheme offers a fixed-income, long-term investment with a lock-in period of 15 years. Withdrawals can be made after 5 years, and partial withdrawals.

Understanding Gratuity in India

Gratuity is a form of monetary benefit provided by an employer to an employee as a token of appreciation for the services rendered by the employee during their period of employment. This note discusses the calculation of gratuity for employees in India.

Eligibility for Gratuity
To be eligible for gratuity in India, an employee needs to complete a minimum of 5 years of continuous service with an organization. However, in cases of death or disability due to an accident or disease, gratuity can be paid before completing five years.

Calculation of Gratuity
The gratuity payable depends on two factors: last drawn salary and the number of years of service. The Payment of Gratuity Act, 1972 divides non-government employees into two categories: those covered under the act and those not covered.

For employees covered under the act, the formula for calculating gratuity is based on 15 days of last drawn salary for each completed year of service or part thereof in excess of 6 months. The formula is (15 X last drawn salary X tenure of working) divided by 26.

For employees not covered under the act, there is no law that restricts an employer from paying gratuity. The amount of gratuity payable to the employee can be calculated based on half month’s salary for each completed year. The formula is (15 X last drawn salary X tenure of working) divided by 30.

Retirement Gratuity
Retirement gratuity is calculated as one-fourth of a month’s basic pay plus dearness allowance drawn before retirement for each completed six monthly period of a qualifying service. The retirement gratuity payable is 16 times the basic pay subject to a maximum of Rs 20 lakh.

Gratuity Rates
The gratuity rates applicable to qualifying years of service in India are shown in the table below.

Gratuity rates applicable corresponding to qualifying service
Qualifying service Rate
Less than one year 2 times of basic pay
One year or more but less than 5 years 6 times of basic pay
5 years or more but less than 11 years 12 times of basic pay
11 years or more but less than 20 years 20 times of basic pay

Taxability of Gratuity
In India, the taxability of gratuity depends on the recipient’s job. For government employees, there is no tax on gratuity. For private sector employees covered under the Payment of Gratuity Act, 1972, any gratuity received is tax exempt to the extent of the least of the following: statutory limit of Rs. 20 Lakh, last drawn salary * 15/26 * No. of completed years of service, or actual gratuity. If the gratuity exceeds the limit mentioned above, it becomes taxable. For private sector employees not covered under the act, any gratuity received is tax exempt to the extent of the least of the following: statutory limit of Rs 20 Lakh or gratuity = Average salary x one half x No. of years of service.

Superannuation Benefit

Points Explanation
Introduction Employers provide superannuation plans to augment retirement benefits
  Company appoints trustees to administer the scheme and get it approved by Commissioner of Income
Types of Group Superannuation Scheme Trust fund where fund managers manage the fund
  Investment in a superannuation scheme from a life insurance company
Retirement Benefits Employee can take one-third of accumulation in account as commutation
  Commutation allows for taking a portion of annuity corpus in a lump sum
  Balance in corpus used to purchase an annuity
  Other life insurance companies allow purchase of annuity from any provider except LIC
  Income tax rules restrict employer’s contribution to 27% of employee’s earnings
  Payments received at retirement exempt from tax only in specified conditions
  Contributions treated as perquisite if exceed Rs 7.5 lakhs in a financial year
  Payment received at time of death from an approved Superannuation Fund exempted from tax

National Pension System (NPS)

National Pension System (NPS) is a pension scheme initiated by the Central Government, available to public, private, and unorganised sectors except the armed forces, and to Indian citizens on a voluntary basis. It encourages individuals to invest in a pension account at regular intervals during employment, and post-retirement, the subscribers can take out a certain percentage of the corpus. As an NPS account holder, one can receive the remaining amount as a monthly pension post-retirement. NPS is a contributory pension system, and there is no guaranteed return or principal protection. The NPS platform offers four models to its users, including the Government model, the All Citizens Model, the Corporate model, and the Atal Pension Yojana for the unorganised sector.

The two primary account types under the NPS are Tier I and Tier II. The former is a mandatory account, while the latter is a voluntary addition. The Tier-I account is mandatory for everyone who opts for the NPS scheme, and the Central Government employees have to mandatorily contribute 10% of their basic salary. For everyone else, the NPS is a voluntary investment option. There are four asset classes across which contributions can be invested, including Equity, Corporate debt, Government Bonds, and Alternative Investment Funds, and these choices can be exercised through the seven pension fund managers allowed to manage the NPS funds.

NPS Account Type NPS Tier-I Account NPS Tier-II Account
Status Default/ Mandatory Voluntary
Withdrawals Conditional and Restricted Permitted
Tax deduction on contribution by employee/self-employed person Up to Rs 2 lakh p.a. i.e. an exclusive Rs. 50,000 for contribution to the NPS scheme itself and Rs. 1,50,000 along with other deductions mentioned in Section 80C. For consideration of this deduction, the limit is 10% of Basic + DA and 20% of Gross Total Income for self-employed (under Sec 80CCD(1) and 80CCD (1B) of IT Act). Government employees – Deduction available under Sec 80C (i.e. maximum Rs. 1.5 lakh). Other employees – No exemptions. Not applicable
Tax deduction on contribution made to NPS account by Employer Upto 14% of Basic + DA for central government employee and 10% for any other employer Section 80CCD (2). Note: the contribution made by the employer is considered as a perquisite in the hands of the employer and is available for deduction under this Section Not applicable
Minimum NPS contribution Each contribution to be of minimum Rs 500; subject to minimum yearly contribution of Rs. 1000. Rs 250
Maximum NPS contribution No limit No limit

Atal Pension Yojana (APY)

Atal Pension Yojana is a pension scheme introduced by the Government of India in 2015-16, regulated by the Pension Fund Regulatory and Development Authority (PFRDA), and targeted towards providing pension benefits to individuals in the unorganized sector. It replaces the previously institutionalized Swavalamban Pension Yojana.

Objectives:

  • To encourage savings from an early age to mitigate basic financial obligations of individuals during retirement.
  • The amount of pension which an individual shall receive is directly dependent on the monthly contributions they decide to make and their age.

Key Features:

  • Automatic debit: Bank account of a beneficiary is linked with their pension account and monthly contributions are directly debited.
  • Facility to increase contributions: The government provides an opportunity to increase and even decrease one’s contributions once a year to change the corpus amount.
  • Guaranteed pension: Beneficiaries of the scheme can choose to receive a periodic pension of Rs. 1000, Rs. 2000, Rs. 3000, Rs. 4000, or Rs. 5000, depending on their monthly contributions.
  • Age restrictions: Individuals who are above 18 years and below 40 years of age can invest in the Atal Pension Yojana.
  • Withdrawal policies: If a beneficiary has attained the age of 60, he/she shall be eligible to annuitise the entire corpus amount, i.e. receive monthly pensions after closing the scheme with the respective bank.
  • Terms of penalty: If beneficiary delays in the payment of contributions, penalty charges are applicable. In the case of continued default in payment for 6 consecutive months, such account shall be frozen and if such default continues for 12 consecutive months, that account shall be deactivated.
  • Tax exemptions: Tax exemption is available on contributions made by individuals towards Atal Pension Yojana under Section 80CCD of the Income Tax Act, 1961.

Eligibility Criteria:

  • Must be an Indian citizen.
  • Should have a savings bank account.
  • Should be between 18 and 40 years of age.
  • Should not be an income taxpayer.
  • Should not be a member of any other social security scheme.

APY Short Notes:

Parameters Details
Objective To provide pension benefits to individuals in the unorganized sector and encourage savings from an early age to mitigate basic financial obligations of individuals during retirement.
Regulator Pension Fund Regulatory and Development Authority (PFRDA)
Key Features Automatic debit, facility to increase contributions, guaranteed pension, age restrictions, withdrawal policies, terms of penalty, tax exemptions.
Eligibility Criteria Indian citizen, savings bank account, between 18-40 years of age, non-income taxpayer, not a member of any other social security scheme.

Retirement Plans from Mutual Funds and Insurance Companies

Retirement plans are an essential part of an individual’s financial planning. They help in creating a corpus for the post-retirement phase of life. Both mutual fund and insurance companies offer retirement-specific products.

Retirement Plans from Insurance Companies:

  • Pension Plans: Insurance companies offer pension plans, which are deferred products that require the policyholder to pay premiums till a specified age. These premiums are deductible under section 80C. The corpus accumulated is used to provide a pension to the policyholder.
  • Pension Options: Insurance companies provide various pension options, such as a pension for the policyholder for a lifetime, and a pension for the spouse post the policyholder’s death. The rate of pension varies based on the selected option. Both ULIP and traditional pension plans are available.

Retirement Plans from Mutual Funds:

  • Hybrid Products: Mutual funds offer retirement-specific schemes, which are usually hybrid products with a mix of equity and debt investments.
  • Variants: Within a scheme, there are 3-4 variants, each offering different allocations to equity and debt. Some funds also provide insurance coverage up to a specified age of the investor.
  • Lock-In Period: Retirement schemes from mutual funds typically have a lock-in period of at least 5 years or until retirement age, whichever is earlier.
Retirement Plans Insurance Companies Mutual Funds
Products Pension Plans Hybrid Products
Premium Payment Till specified age –
Deduction 80C –
Pension Options Lifetime pension, Spouse pension –
Investment Type ULIP, Traditional Equity and Debt
Lock-In Period – At least 5 years or till retirement age

Creating Retirement Portfolios as an Investment Adviser

  • Investment advisers need to manage psychological stress of clients before making investment decisions
  • Advisers need to understand clients’ personal needs and encourage them to set goals, plan lifestyle and finances
Topic Notes
Managing Psychological Stress Investment advisers need to manage the psychological stress of clients before making investment decisions.
Understanding Personal Needs Advisers need to understand clients’ personal needs and encourage them to set goals, plan lifestyle and finances.
Key Factors to Consider Key factors to consider when creating retirement portfolio include liquidity, security, estimated returns, resistance to inflation, taxes, and social security.
Investment Philosophy of Clients Clients may have different investment philosophies based on their experiences and risk appetite.
Asset Allocation Final portfolio will depend on above factors and may be invested in equity, debt, gold, or other asset classes appropriate for the investor. Asset allocation will be decided by the adviser based on clients’ risk appetite.
Salaried Employer Benefits For salaried employers, benefits such as EPF, NPS, Superannuation, and Gratuity form the core of the retirement portfolio and are advised by the adviser.

Distribution Related Products for Retirement Planning

Introduction: In retirement planning, distribution related products play a crucial role in generating income to meet expenses. These products are designed to generate periodic income, provide adequate returns, and have lower risks to income and principal invested. This article discusses the most common distribution related products used in retirement planning.

Annuity from Insurance Companies

An annuity is a fixed stream of payment for a life term or a pre-defined period. An annuity contract is a life insurance policy in which the annuity provider (insurer) agrees to pay the purchaser of annuity (annuitant) a series of regular payments for a fixed period or over someone’s lifetime. Annuities are designed in two basic types:

Deferred Annuity
Deferred annuity is purchased during working years in anticipation of the need of retirement income in later years. The annuity payments begin after a specified period, i.e., more than 12 months after the date on which the annuity is purchased.

Immediate Annuity
Immediate annuity payments begin within 12 months after the purchase of the annuity.

Annuity Payout Options
The payout options available for annuities are:
a. Life time without return of purchase price
b. Life time with return of purchase price
c. Annuity guaranteed for a certain period
d. Joint Annuity

Taxability of Annuities
Unlike life insurance policies, annuities do not enjoy tax-exempted status. The money received by the annuitant is treated as income and taxed in the hands of the annuitant. The premium paid for the annuity policy is eligible for tax benefits under Section 80C within the overall limit prescribed by the Income Tax Act.

Payout Option Description
Life time without return of purchase price The annuity is paid for the lifetime and stops once the investor dies. The principal amount (purchase price) is retained by the company. The annuity amount is the highest in this option.
Life time with return of purchase price The annuity is paid lifetime to the investor, and the purchase price is returned to the nominee after the investor’s death. The annuity amount will be the lowest in this option.
Annuity guaranteed for a certain period Annuity is paid for a defined period, say 10 or 20 years, irrespective of the survival of the policyholder. Beyond this, the amount is paid only to the policyholder till he/she dies.
Joint Annuity The spouse also gets the annuity for a lifetime after the death of the investor.

Systematic Withdrawal Plans (SWP) from Mutual Funds

Systematic Withdrawal Plans (SWP) is an option provided by mutual fund schemes, where a scheduled investment withdrawal plan is set up in a specified frequency. SWP can be used to withdraw either a fixed amount or only the capital gains based on the investor’s requirements. This plan can be beneficial for generating regular income for retirees to meet their monthly expenses.

SWP Frequency:
Mutual funds offer multiple withdrawal frequencies such as monthly, quarterly, half-yearly, or annually. The desired frequency can be chosen based on the financial requirements. Through a fixed withdrawal option, a specified amount can be redeemed from investments. On the other hand, with an appreciation withdrawal option, only the appreciated amount can be withdrawn.

Withdrawal Calculation:
The value of the mutual fund is reduced by the number of units withdrawn in the case of an SWP. Suppose an investor has 8,000 units in a mutual fund scheme and wishes to withdraw Rs. 5,000 every month through an SWP. If the Net Asset Value (NAV) of the scheme is Rs. 10, the withdrawal of Rs. 5,000 will mean that 500 units are being sold. The remaining units post this withdrawal will be 7,500 units. At a higher NAV, fewer units may be redeemed to fulfill the cash requirements, while at a lower NAV, the redemption of more units may be required.

Taxation in SWP:
Any redemption through SWP is subject to taxation. The rate of taxation depends on the type of funds and holding period. In the case of SWP from debt funds, if the holding period is less than or equal to 36 months, the capital gain portion of the withdrawn amount will form a part of the income and be taxed as per one’s income slab. However, if the holding period is more than 36 months, the capital gains portion of the withdrawal will be taxed at 20% with indexation benefit for resident investors.

In the case of SWP from equity funds, if the holding period is less than or equal to 12 months, the capital gain portion of the withdrawn amount will be taxed at the rate of 15%. On the other hand, if the holding period is more than 12 months, the capital gains portion of the withdrawn amount will be taxed at 10% without indexation.

Laddering of Bonds or Fixed Deposits

Laddering strategy is an effective strategy to create a good retirement income. Instead of buying securities that is scheduled to become due during the same year one purchases bonds or FDs that are staggering at different dates i.e. maturing at different dates.

Laddering of Bonds and Fixed Deposits

Laddering of Bonds

  • Strategy to create retirement income by purchasing bonds or FDs with staggering maturity dates
  • Two primary goals: managing interest rate risk and managing cash flow
  • Laddering reduces risk by investing in bonds with different maturity dates
  • Helps to benefit from rising interest rates and already have bonds locked in at higher rates
  • Can manage cash flow by structuring maturity dates to generate regular income

Example: Mr. B invested USD 500,000 in 5 different bonds with maturities of 1, 2, 3, 4, and 5 years respectively. As each bond matures, he reinvests the money in the bond with the longest maturity, keeping the ladder intact.

Laddering of Fixed Deposits

  • Same strategy as laddering of bonds applied to fixed deposits
  • Instead of buying a single FD, buy multiple FDs with different maturities
  • Helps to reduce the impact of interest rate fluctuations and keep most funds secure
  • Can choose different banks for different ladders to diversify investments for better earnings

Example: Mr. C invested Rs. 10 lakh by breaking it into five equal parts and investing in 1-year, 2-year, 3-year, 4-year, and 5-year FDs. As each FD matures, he reinvests the money in a new 5-year FD, creating an investment loop to meet his financial requirements every year.

  Laddering of Bonds Laddering of Fixed Deposits
Primary investment Bonds Fixed Deposits
Purpose To manage risk and cash flow for retirement income. To manage risk and cash flow for regular income.
Maturity Bonds mature at different dates. FDs mature at different dates.
Interest Rates Bonds are most impacted by interest rate movements. Investments are less impacted by interest rate fluctuations in long term.
Investment Amount High Low to Medium
Reinvestment Bonds are reinvested in new bonds. FDs are reinvested in new FDs.
Liquidity Less flexible More flexible
Risk High Low
Returns Potentially higher Lower but stable

Overview of Senior Citizens’ Savings Scheme (SCSS)-

Heading Subheading Information
Eligibility Age Criteria Residents aged 60 and above. Individuals aged 55-60 and retired under superannuation/VRS. Defence service personnel at 50 or above.
  Nationality Only for resident Indians. Not available for NRIs, PIOs, or HUFs.
Deposit Minimum Deposit Rs. 1,000
Limits Maximum Deposit Rs. 15 lakh
  Deposit Mode Cash for less than Rs. 1 lakh, cheque/demand draft for more than Rs. 1 lakh.
Maturity Maturity Period 5 years from the date of account opening.
  Extension Can be extended for an additional 3 years after maturity. Only available once, and extension request must be made within 1 year.
Taxability Deduction Benefit Investments qualify for income tax deduction up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961.
  Tax on Interest Interest is fully taxable. TDS applicable if interest exceeds Rs. 50,000 for a fiscal year.
Interest Rate of Interest Reviewed quarterly and subject to change. Interest calculated and credited quarterly.
Premature Penalties 1.5% penalty for exit between 1-2 years. 1% penalty for exit between 2-5 years.
Closure Account Closure on Death Account closed on death, and maturity proceeds transferred to nominee/legal heir.
  Procedure for Claiming Maturity Nominee/legal heir needs to fill a written application in a prescribed format along with the Death Certificate.

Pradhan Mantri Vaya Vandana Yojana (PMVVY)

Heading Subheading Information
Scheme name Pradhan Mantri Vaya Vandana Yojana (PMVVY) The scheme was launched by the Government of India in 2017 to provide pension benefits for citizens 60 years in the private sector.
Scheme operator LIC of India The scheme is operated by LIC of India.
Scheme duration 10 years This is a 10-year scheme.
Minimum pension Rs. 1,000/month The minimum pension is Rs. 1,000 per month.
Maximum pension Rs. 10,000/month or Rs. 1,20,000/year The maximum pension is Rs. 10,000 per month or Rs. 1,20,000 per year.
Purchase price/investment Rs. 1,50,000 to Rs. 15,00,000 For the minimum monthly pension of Rs. 1,000/month, the purchase price or investment required is Rs. 1,50,000 and for the maximum monthly pension of Rs. 10,000/month, the investment required is Rs. 15,00,000. The purchase price is marginally lower if the quarterly, half-yearly or annual mode of pension is chosen. The investment is returned on maturity.
Surrender policy 98% purchase price returned 98 percent of the purchase price will be returned if the policy is surrendered for specified needs such as critical healthcare requirements.
Loan facility Available after three policy years After the completion of three policy years, loan to the extent of 75 percent of the purchase price can be availed at the prevailing interest rates.
Modified PMVVY scheme Introduced in 2020 Government of India has introduced Pradhan Mantri Vaya Vandana Yojana (Modified-2020), with modified rate of pension under this plan and extended the period of sale of this plan for a further period of three years from Financial Year 2020-21 till 31st March, 2023.
Eligibility Minimum age: 60 years The minimum entry age is 60 years (completed). However, there is no maximum age limit is prescribed.
Minimum pension Rs. 1,000/month or Rs. 3,000/quarter or Rs. 6,000/half-year or Rs. 12,000/year The minimum pension is Rs. 1,000 per month or Rs. 3,000 per quarter or Rs. 6,000 per half-year or Rs. 12,000 per year.
Maximum pension Rs. 9,250/month or Rs. 27,750/quarter or Rs. 55,500/half-year or Rs. 1,11,000/year The maximum pension is Rs. 9,250 per month or Rs. 27,750 per quarter or Rs. 55,500 per half-year or Rs. 1,11,000 per year.
Total investment limit Rs. 15 lakhs Total amount of purchase price under all the policies under this plan, and all the policies taken under PMVVY allowed to a senior citizen shall not exceed Rs. 15 lakhs.
Purchase price Lump sum payment The scheme can be purchased by payment of a lump sum Purchase Price. The pensioner has an option to choose either the amount of pension or the Purchase Price. The minimum and maximum Purchase Price required will depend on the mode of pension chosen.

Post Office Monthly Income Scheme (POMIS)

Heading Subheading Details
Scheme Name Post Office Monthly Income Scheme (POMIS) A government-sponsored savings scheme
Offering Department Department of Post (DoP) or Indian Post  
Eligibility – Account can be opened by:
i. A single adult
ii. 2 or 3 adults jointly
iii. A guardian on behalf of minor/ person of unsound mind
iv. A minor above 10 years in his own name
Deposit Minimum Deposit Rs. 1000 and in multiples of Rs. 100
  Maximum Deposit (Single account) Rs. 4.50 lakh
  Maximum Deposit (Joint account) Rs. 9 lakh
  Joint account All the joint holders shall have equal share in investment
  Maximum number of accounts An individual may open and operate one or more than one account as a single account or a joint account under this Scheme subject to the ceiling of maximum deposit limit.
  Maximum Deposit limit (all accounts) Deposits in all the accounts taken together for an individual shall not exceed four lakh fifty thousand rupees in a single account and nine lakh rupees in a joint account.
Interest Payable On completion of a month from the date of opening and so on till maturity
  Unclaimed monthly interest If the interest payable every month is not claimed by the account holder such interest shall not earn any additional interest
  Excess deposit made In case any excess deposit made by the depositor, the excess deposit will be refunded back and only PO Savings Account interest will be applicable from the date of opening of account to the date of refund
  Interest payment options Interest can be drawn through auto credit into savings account standing at the same post office, or ECS. In case of MIS account at CBS Post offices, monthly interest can be credited into savings account standing at any CBS Post Offices
  Tax on interest Interest is taxable in the hand of depositor
Pre-mature closure Minimum lock-in period No deposit shall be withdrawn before the expiry of 1 year from the date of deposit
  Deduction for closure after 1 year and before 3 years Deduction equal to 2% from the principal will be deducted and remaining amount will be paid
  Deduction for closure after 3 years and before 5 years Deduction equal to 1% from the principal will be deducted and remaining amount will be paid
  Procedure for pre-mature closure Account can be prematurely closed by submitting a prescribed application form with a passbook at the concerned Post Office
Maturity Closure Account may be closed on expiry of 5 years from the date of opening by submitting a prescribed application form with a passbook at the concerned Post Office
  Death of account holder In case the account holder dies before maturity, the account may be closed and the amount will be refunded to nominee/legal heirs. Interest will be paid up to the preceding month, in which refund is made

Features of Reverse Mortgage Scheme

Feature Details
Purpose To provide a regular source of income for senior citizens by pledging their self-occupied residential property.
Eligibility Criteria Indian citizens of 60 years or more. Married couples can apply as joint borrowers, with at least one of them being above 60 years of age and the other not below 55 years of age. The property should be a self-occupied residential house or flat in India with clear title and no encumbrances. The residual life of the property should be at least 20 years. The borrower(s) should use the property as their permanent primary residence.
Loan Amount Depends on the age of the borrower, appraised value of the house, and the prevalent interest rates of the lending institution. The maximum monthly payments under RML have been capped at Rs.50,000. The maximum lump sum payment shall be restricted to 50% of the total eligible amount of loan subject to a cap of Rs. 15 lakhs, to be used for medical treatment for self, spouse and dependants, if any. The balance loan amount would be eligible for periodic payments.
Interest Rate and Tenure The rate of interest and the nature of interest (fixed or floating) will be decided by the lender. The maximum tenure of an RML will be 20 years. The borrower can prepay the loan at any time without a penalty. The borrower can opt for the frequency of EMI pay out (a monthly, quarterly, and annual or lump sum payments) at any point, as per his discretion.
Ownership and Service of Loan The borrower will remain the owner of the house property and need not service the loan during his/her lifetime as long as the property is used as primary residence. Periodic payments under RML will cease after the conclusion of the loan tenure. Interest will accrue until repayment. The Reverse Mortgage loan can be prepaid at any time during the loan period. On clearance of all the dues, all the title deeds will be returned by the lender.
Taxation All receipts under RML shall be exempt from income tax under Section 10(43) of the Income-Tax Act, 1961.
Termination of Loan An RML will become due and payable only when the last surviving borrower dies or permanently moves out of the house. An RML will be settled by proceeds obtained from the sale of the house property mortgaged. After the final settlement, the remaining amount (if any) will be given to the borrower or his/her heirs/beneficiary. However, the borrower or his/her heirs may repay the loan from other resources without allowing the property to be sold.
Reverse Mortgage Loan Enabled Annuity (RMLEA) The RMLEA is an extension of the reverse mortgage scheme. The scheme ensures a lifetime payout to the senior citizens through an annuity bought from an insurance company using the reverse mortgage loan amount disbursed by the primary lending institutions. The scheme will be available to senior citizens of India over 60 years of age who are the owners of the property. In the case of married couples applying as joint borrowers, at least one of the borrowers should

Mock Tests-

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Investment Advisor Level 2

Chapter 5: Retirement Products -1

1 / 50

1. How much of the corpus should be utilized for purchasing an annuity if a subscriber exits before the age of 60 or superannuation after a minimum period of 10 years?

2 / 50

2. What is the minimum deposit required to open a Post Office Monthly Income Scheme (POMIS) account?

3 / 50

3. What is the maximum exemption allowed for contributions to Atal Pension Yojana under Section 80CCD (1) of the Income Tax Act?

4 / 50

4. What is the age group for individuals to join the Atal Pension Yojana?

5 / 50

5. What is the eligibility criteria for individuals to invest in Atal Pension Yojana?

6 / 50

6. What is a reverse mortgage?

7 / 50

7. Which of the following are the tax implications of the NPS?

8 / 50

8. What are the key factors that an investment adviser has to take into consideration while creating a retirement portfolio for their clients?

9 / 50

9. How do I calculate the amount of money that I can withdraw from my mutual fund investments through an SWP?

10 / 50

10. What are the risks of an SWP?

11 / 50

11. How is the money received by the annuitant taxed?

12 / 50

12. What are the various payout options available?

13 / 50

13. What is the maximum amount of tax deduction available under section 80 CCD (1) for contributions made by the subscriber in the individual pension account?

14 / 50

14. What is the main goal of laddering bonds?

15 / 50

15. What is the tax treatment of withdrawals from mutual fund investments through an SWP?

16 / 50

16. What is the minimum deposit amount required to open a Senior Citizens’ Savings Scheme account?

17 / 50

17. Which of the following is a retirement plan offered by insurance companies?

18 / 50

18. What is the primary convenience of the Atal Pension Yojana regarding contributions?

19 / 50

19. What are the benefits of laddering bonds or fixed deposits?

20 / 50

20. What is the maximum deposit limit for the Senior Citizens’ Savings Scheme?

21 / 50

21. What is the maximum amount of tax-free withdrawal allowed under section 10(12for partial withdrawals?

22 / 50

22. At what age can a beneficiary of Atal Pension Yojana annuitize the entire corpus amount and receive monthly pensions?

23 / 50

23. Who is eligible for a reverse mortgage?

24 / 50

24. How are reverse mortgages repaid?

25 / 50

25. What is the annuity rate?

26 / 50

26. What is the penalty for continued default in payment for 6 consecutive months in Atal Pension Yojana?

27 / 50

27. What is the best way to ladder bonds or fixed deposits?

28 / 50

28. What is the frequency of periodic annuity payments?

29 / 50

29. What happens if an individual chooses to exit Atal Pension Yojana before reaching the age of 60?

30 / 50

30. What is the main goal of laddering fixed deposits?

31 / 50

31. What is the withdrawal option for subscribers joining NPS beyond the age of 60 years but before attaining 70 years before completing three years in NPS?

32 / 50

32. How many different periodic pension options are available in Atal Pension Yojana?

33 / 50

33. What is the tax treatment for investments in the Senior Citizens’ Savings Scheme?

34 / 50

34. Which of the following products are used to generate income in the distribution stage of retirement?

35 / 50

35. What is the maximum lumpsum withdrawal allowed if the accumulated corpus at the time of exit is equal to or less than Rs. 2.5 lakhs?

36 / 50

36. What is the maximum amount of tax deduction available under section 80CCD(1for additional self contribution?

37 / 50

37. What are the benefits of a reverse mortgage?

38 / 50

38. Who can open a Post Office Monthly Income Scheme (POMIS) account?

39 / 50

39. When does a Senior Citizens’ Savings Scheme account mature?

40 / 50

40. What are the benefits of an SWP?

41 / 50

41. What is a Systematic Withdrawal Plan (SWP)?

42 / 50

42. What is the maximum amount of tax-free withdrawal allowed under section 10(12at the stage of exit on maturity?

43 / 50

43. Which of the following is a retirement plan offered by mutual funds?

44 / 50

44. Which of the following is an annuity product offered by insurance companies?

45 / 50

45. What are the eligibility criteria to avail the Senior Citizens’ Savings Scheme (SCSS)?

46 / 50

46. Which of the following modes can be used to purchase an annuity?

47 / 50

47. Atal Pension Yojana is an extension of which pension scheme?

48 / 50

48. Atal Pension Yojana was introduced by the Government of India in which year?

49 / 50

49. What is the penalty for premature exit from the Senior Citizens’ Savings Scheme before completion of 2 years?

50 / 50

50. How much money can a homeowner borrow with a reverse mortgage?

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Investment Advisor Level 2

Chapter 5: Retirement Products - 2

1 / 50

1. At what age can a subscriber exit from NPS and use a minimum of 40% of the corpus to buy an annuity?

2 / 50

2. How is the tenure of service considered when calculating gratuity for employees not covered under the Act?

3 / 50

3. Who is eligible to participate in the National Pension System (NPS)?

4 / 50

4. What is the withdrawal option for subscribers joining NPS beyond the age of 60 years but before attaining 70 years?

5 / 50

5. What is commutation in the context of superannuation benefits?

6 / 50

6. How can the tenure of a PPF account be extended?

7 / 50

7. What is the tenure of service considered when calculating gratuity for employees covered under the Act?

8 / 50

8. How is the amount of gratuity calculated for employees covered under the Act?

9 / 50

9. What is the Public Provident Fund (PPF)?

10 / 50

10. Which asset class in NPS predominantly invests in equity market instruments?

11 / 50

11. What is the tax exemption limit for gratuity received by private employees not covered under the Payment of Gratuity Act, 1972?

12 / 50

12. What are the interest rates for the PPF?

13 / 50

13. What is the maximum investment allowed in a PPF account in one year?

14 / 50

14. What are the key features of the PPF?

15 / 50

15. What are the withdrawal rules for the PPF?

16 / 50

16. What are the eligibility criteria for opening a PPF account?

17 / 50

17. How is gratuity calculated?

18 / 50

18. What is the gratuity rate applicable for a qualifying service of 11 years or more but less than 20 years?

19 / 50

19. Who is eligible to open a PPF account?

20 / 50

20. What is the purpose of superannuation plans offered by employers?

21 / 50

21. Under the NPS Auto Choice, which life cycle fund caps the equity exposure at a maximum of 50%?

22 / 50

22. What is the statutory limit for tax exemption on gratuity for private sector employees covered under the Payment of Gratuity Act, 1972?

23 / 50

23. In the NPS Active Choice, what is the maximum permitted allocation to equities?

24 / 50

24. What is the maximum amount of gratuity that can be paid?

25 / 50

25. How is the taxation of PPF contributions, interest earned, and maturity proceeds?

26 / 50

26. What is the maximum amount that can be withdrawn per financial year in a PPF account?

27 / 50

27. When does gratuity become taxable for private sector employees covered under the Act?

28 / 50

28. Who is eligible for gratuity?

29 / 50

29. What happens if an employee dies before retirement?

30 / 50

30. Which formula is used to calculate the tax-exempt portion of gratuity for private sector employees covered under the Act?

31 / 50

31. Which formula is used to calculate the tax-exempt portion of gratuity for private employees not covered under the Act?

32 / 50

32. When can a PPF account holder take a loan against the balance?

33 / 50

33. How can a company offer a group superannuation scheme?

34 / 50

34. What is the minimum annual investment required in a PPF account?

35 / 50

35. Which form should be submitted to withdraw a partial amount from a PPF account?

36 / 50

36. What components are considered in the last drawn salary for gratuity calculation?

37 / 50

37. What are the tax implications of payments received at the time of retirement from an approved Superannuation Fund?

38 / 50

38. What happens if an employee is disabled before retirement?

39 / 50

39. How is gratuity taxability different for government employees compared to private sector employees?

40 / 50

40. What is the minimum period of investment required to make partial withdrawals from NPS Tier I accounts?

41 / 50

41. What is the lock-in period for a PPF account?

42 / 50

42. What is the gratuity rate applicable for a qualifying service of less than one year?

43 / 50

43. What are the taxation rules for the PPF?

44 / 50

44. After how many years can partial withdrawals be made from a PPF account?

45 / 50

45. What is gratuity?

46 / 50

46. What is the maximum retirement gratuity payable?

47 / 50

47. What is the gratuity rate applicable for a qualifying service of 5 years or more but less than 11 years?

48 / 50

48. What is the maximum lumpsum withdrawal allowed if the accumulated corpus at the time of exit is equal to or less than Rs. 5 lakhs?

49 / 50

49. What is the maximum gratuity amount payable in the event of an employee's death?

50 / 50

50. How is the amount of gratuity calculated for employees not covered under the Act?

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Chapter 5: Retirement Products - 3

1 / 29

1. What is the importance of buying appropriate health insurance for students going overseas?

2 / 29

2. What is the advantage of buying insurance policies online?

3 / 29

3. What does Overseas Travel Insurance cover during international travel?

4 / 29

4. Who does Directors and Officers insurance provide coverage for?

5 / 29

5. What does motor insurance cover in the event of an accident?

6 / 29

6. What does Critical Illness Insurance provide coverage for?

7 / 29

7. In a/an insurance plan, the exact losses incurred by an insured are not ascertainable or are difficult to ascertain.

8 / 29

8. What are the benefits and limitations of having insurance from multiple companies?

9 / 29

9. What is the purpose of Keyman Insurance?

10 / 29

10. What is a "no claim" bonus in car insurance?

11 / 29

11. What is the significance of portability in health insurance policies?

12 / 29

12. Do life insurance policies pay if the death occurs outside India?

13 / 29

13. Are multiple Defined benefit policies payable regardless of the number of policies the insured person has?

14 / 29

14. Which type of insurance provides protection against risks to property such as fire and theft?

15 / 29

15. Can Indian residents buy insurance policies from foreign companies?

16 / 29

16. What expenses are typically reimbursed in health insurance policies?

17 / 29

17. Are Indian policies generally cheaper than policies issued by foreign companies?

18 / 29

18. Do health insurance policies cover hospitalization expenses incurred outside India?

19 / 29

19. How can multiple health insurance policies be useful in certain situations?

20 / 29

20. What is the purpose of Liability Insurance?

21 / 29

21. How does Critical Illness Insurance differ from life insurance?

22 / 29

22. What is the primary difference between a health insurance policy and a critical illness policy?

23 / 29

23. What is the minimum survival period required for reimbursement under Critical Illness Insurance?

24 / 29

24. Should students going overseas for studies buy health insurance from an Indian insurance company or from the insurance company of that country?

25 / 29

25. Which of the following characteristics are required for a risk to be insurable?

26 / 29

26. What types of disablement are covered under Personal Accident Insurance?

27 / 29

27. When does a health insurance policy typically pay the claim?

28 / 29

28. What type of policy is a critical illness policy?

29 / 29

29. What does Fidelity Insurance cover?

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