Retirement Planning India

Chapter 1: The Characteristic India Demography, Family and the Retirement Preparedness India demography 1.1 A young India with low old age dependency ratio India is the second most populated country in the world with nearly a fifth of the world's population. According to the 2019 revision of the World Population Prospects [6][7] the population stood at 1,352,642,280. Between 1975 and 2010, the population doubled to 1.2 billion, reaching the billion marks in 1998. India is projected to surpass China to become the world's most populous country by 2024.[8] It is expected to become the first country to be home to more than 1.5 billion people by 2030, and its population is set to reach 1.7 billion by 2050.[9][10] Its population growth rate is 1.13%, ranking 112th in the world in 2017.[11] India has more than 50% of its population below the age of 25 and more than 65% below the age of 35. In India, Bihar, West Bengal, Uttar Pradesh and Madhya Pradesh are the most populated states. Sex ratio in India apart from Kerala is male vs female: 1000:920 The average literacy rate of the country is about 74%, with 82% of the male population and about 65% of the female population being educated Many Asian economies like Japan, China & South Korea have seen the golden periods of double digit GDP growth In our country numbers of youths are more so they can contribute to country’s productivity. CFP Level 2 - Module 1 - Retirement Planning - India Page 1

However, as more and more people get into the working age group, the number of jobs and the skills required to consistently remain beneficial to the economy will be a challenge that the government would have to resolve. 1.2 Improving Life Expectancies, other Potential Disruptions to India Demography The current life expectancy for India in 2020 is 69.73 years, a 0.33% increase from 2019. The life expectancy for India in 2019 was 69.50 years, a 0.33% increase from 2018. The average life expectancy of male is around 68 and female around 70. In India working population between the age of 20 to 50 is around 50% of total population. Around 5% of total population being above the dependent age of 65. World population has gone up to about 7.5 billion today. Global population continues to grow but has slowed down and is distributed more towards the underdeveloped countries than towards the advanced economies. Several advanced economies like Italy, Japan, Germany, South Korea, and Singapore have abundant resources today however have the challenge of automation replacing its human resources. Couple that with the rapidly increasing ageing population as life expectancy increases and birth rate decreases in advanced economies presents a higher challenge for the working population. In such a scenario a young country like India where automation is still underway, the opportunity for the economy and its youth is immense. The challenges before the government though would be to maintain a consistent supply of good education to keep the working age population skilled enough to carry out its jobs, decent employment opportunities to take full advantage of the capabilities of the young working class and a good health infrastructure to take care of its young and ageing population which will be a minority for these years. It will be a necessity for the young workers to keep themselves up skilled at all times, gainfully employed while maintaining their aspirational expenses in check and begin a saving program early not just for the later-age retirement but also for an untimely loss of job or gap in employment. CFP Level 2 - Module 1 - Retirement Planning - India Page 2

1.3 Fiscal Constraints to deal with Large-scale Social Security Programs Social security is a government led program where it provides assistance to its citizens to live through the phase of their lives, where there is no or inadequate income, providing them with monetary benefits for their survival and sustenance. While a great deal of the Indian population is in the unorganized sector and may not have an opportunity to participate in each of these schemes, Indian citizens in the organized sector and their employers are entitled to coverage under the above schemes. There are two major social security plans in India, the Employees’ Provident Fund Organization (EPFO) and the Employees’ State Insurance Corporation (ESIC). The EPFO runs a pension scheme and an insurance scheme. All of these are supposed to grant EPFO members and their family’s benefits for old age, disability, and support in case the primary breadwinner dies. The ESIC covers low-earning employees providing them with basic healthcare and social security schemes. Originally aimed at factory workers, the coverage was extended to include greater parts of the population, e.g. employees in hospitals or educational institutions. The ESI scheme has been implemented in all states excluding Manipur and Arunachal Pradesh. Social security schemes for unorganised sector: In order to provide social security benefits to the workers in the unorganised sector, the Government has enacted the Unorganised Workers Social Security Act, 2008. Some of the welfare schemes for unorganised workers stipulated under this act are: 1. The National Social Assistance Programme (NSAP), launched in 1995 is a Centrally Sponsored Scheme of the Government of India that provides financial assistance to the elderly, widows and persons with disabilities in the form of social pensions. 2. Janani Suraksha Yojana (JSY), launched in 2005, is a safe motherhood intervention under the National Rural Health Mission (NRHM) being implemented with the objective of reducing maternal and neonatal mortality by promoting institutional delivery among the poor pregnant women. 3. Rajiv Gandhi Shilpi Swasthya Bima Yojana aims at financially enabling the artisans’ community to access to the best healthcare facilities in the country. This scheme covers not only the artisans but his wife and two children also. CFP Level 2 - Module 1 - Retirement Planning - India Page 3

4. National Scheme of Welfare of Fishermen aims at providing better living standards for fishermen and their families and social security for active fishers and their dependants. 5. Aam Admi Bima Yojana, launched in 2013, is a social security scheme aimed at unorganised sector workers aged between 18 and 59 years, which offers a cover of Rs 30,000. 6. Rashtriya Swasthya Bima Yojana (RSBY), launched in 2008, aims to provide health insurance coverage to the unrecognised sector workers belonging to the BPL category and their family members. It provides for inpatient medical care of up to ₹30,000 per family/year in public as well as empaneled private hospitals. Recently launched schemes Atal Pension Yojna (APY)  Under the APY, subscribers would receive a fixed minimum pension at the age of 60 years, depending on their contributions, which itself would vary on the age of joining the APY.  The Central Government would also co-contribute 50 percent of the total contribution or Rs. 1000 per annum, whichever is lower, for a period of 5 years, who are not members of any statutory social security scheme and who are not Income Tax payers.  The pension would also be available to the spouse on the death of the subscriber and thereafter, the pension corpus would be returned to the nominee.  The minimum age of joining APY is 18 years and maximum age is 40 years. Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY):  Under PMJJBY, life insurance of Rs. 2 lakh would be available on the payment of premium of Rs. 330 per annum by the subscribers.  The PMJJBY will be made available to people in the age group of 18 to 50 years having a bank account from where the premium would be collected through the facility of “auto-debit”. Pradhan Mantri Suraksha Bima Yojana (PMSBY):  Under PMSBY, the risk coverage will be Rs. 2 lakh for accidental death and full disability and Rs. 1 lakh for partial disability on the payment of premium of Rs. 12 per annum. CFP Level 2 - Module 1 - Retirement Planning - India Page 4

 The Scheme will be available to people in the age group 18 to 70 years with a bank account, from where the premium would be collected through the facility of “auto-debit”.  Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) Yojana: Under the scheme, the government has promised a direct payment of Rs. 6000 in three equal instalments of Rs. 2000 each every four months into the Aadhar bank accounts of eligible landholding Small and Marginal Farmers (SMFs) families. Pradhan Mantri Kisan Mandhan Yojana:  Honourable Prime Minister Narendra Modi recently launched a pension scheme for farmers from Ranchi, Jharkhand.  Under the scheme, farmers between 18 and 40 years of age will get Rs 3,000 monthly pension after reaching 60.  The scheme has an outlay of Rs 10,774 crore for the next three years.  All small and marginal farmers (with less than 2 hectares) who are currently between 18 to 40 years can apply for the scheme.  Registration for the farmers’ pension scheme was started on August 9,2019.  Life Insurance of India (LIC) has been appointed insurer for this scheme.  The farmers will have to make a monthly contribution of Rs 55-200, depending on the age of entry, in the pension fund till they reach the retirement date.  This is an optional scheme.  The government started registrations for the Pradhan Mantri Kisan Maan-Dhan Yojana (PM-KMY) on August 9,2019.  The enrolment for the voluntary scheme is being done through the Common Service Centres (CSCs) located across the country.  No fee is charged for registration under the scheme.  The Centre pays Rs 30 to CSC for every enrolment to ensure that the scheme witnesses maximum coverage. Pradhan Mantri Laghu Vyapari Mandhan Yojana, 2019:  The new scheme that offers pension coverage to the trading community was launched from Jharkhand.  Under the scheme, all shopkeepers, retail traders and self-employed persons are assured a minimum monthly pension of Rs. 3,000/- month after attaining the age of 60 years. CFP Level 2 - Module 1 - Retirement Planning - India Page 5

 All small shopkeepers and self-employed persons as well as the retail traders with GST turnover below Rs. 1.5 crore and age between 18-40 years, can enrol for this scheme.  The scheme would benefit more than 3 crore small shopkeepers and traders.  The scheme is based on self-declaration as no documents are required except Aadhaar and bank account.  Interested persons can enroll through CSCs across the country.  To be eligible, the applicants should not be covered under the National Pension Scheme, Employees’ State Insurance Scheme and the Employees’ Provident Fund or be an Income Tax assessee.  The Central Government will make matching contribution(same amount as subscriber contribution) i.e. equal amount as subsidy into subscriber’s pension account every month.  Five crore traders are expected to join the scheme in the next three years. Social Security schemes are very important aspect of one’s later life. Most of people will reach a stage where he will not be able to earn his livelihood due to his bad health or due to old age. He will not be interested to earn. For these people social security program is very important for them. These programs could serve well even in times of unexpected events of death, disability, loss of job, sabbaticals or a temporary gap in employment. There are several types of social security programs meant for various kinds of citizens – for the retired, for the disabled, for the widows and also for those who don’t have adequate income. Over the past couple of years, India’s GDP growth has been among the fastest in the world. The government has always been fairly optimistic of its capability to deliver higher GDP growth rate year on year with the target of becoming a 5 trillion USD economy by 2024. At a current GDP of 2.74 trillion USD, India will have to grow at a nominal rate of 12% p.a. to get to its 5 Trillion USD economy target. The government is the biggest spender in India’s economy and its spending on infrastructure, capital investments and social benefit programs does definitely have a multiplier effect on the Indian economy. However, with a 135 crore population, the ability of a government to deal with large scale social security programs can become difficult. CFP Level 2 - Module 1 - Retirement Planning - India Page 6

India has several schemes that are a part of its social security endeavor – Employee Provident Funds, Employee Pension schemes, Employee Deposit Linked Insurance Schemes, Gratuity Act, Health benefits under the Employees State Insurance Act, Workmen’s Compensation Act, Maternity Benefits Act, etc. But with the constraints on the government’s spending power and the magnitude of the population to be covered, increasing funds available for social security measures becomes difficult. Implementation of policies such as bringing working women’s maternity benefits at par with the world’s developed countries has implications of gender discrimination at the work place – since the government faces fiscal constraints in sharing the financial burden of the maternity leave pay with the employer Implementation of policies such as bringing working women’s maternity benefits at par with the world’s developed countries has implications of gender discrimination at the work place – since the government faces fiscal constraints in sharing the financial burden of the maternity leave pay with the employer As a result of which, the citizens are left with fewer options but to focus their working life on saving and planning ahead for not just current expenditure but also later-stage requirements. Explain characteristics of the Indian family unit 1.4 A typical Indian Family - Three generations living together is still more common It is very common to find three or four generations of family members all living together under one roof- dependent upon each other for their social, psychological and monetary requirements. Often, parents in their old age depend upon their children to take care of their day-to-day and medical needs. Women in their maternity and post maternity periods depend upon their mothers and mothers-in-law for childcare and support. Co-dependence on family members of a weaker member who has a disability, has lost a spouse or has lost a job – gives the necessary cushion to an individual to sustain without being worried about the future- so, planning for retirement, maternity, childcare, sickness, disability, personal accidents often is not a priority for Indian families. CFP Level 2 - Module 1 - Retirement Planning - India Page 7

Now nuclear family system is increasing in India, therefore one has to be independent for survival. They must think about retirement planning. No wants to be dependent on others duing post retirement life. Even in case of disability or death, family gets benefit from insurance companies if plans accordingly. 1.5 Other seemingly prior goals and obligations delay or disrupt retirement savings Retirement is one of the most important goal of everyone but many people consider it least important. People give priorities to the following goals: Children’s school and college education Children’s marriage goal, Setting up business for children World tour goal Purchasing big car. Purchasing a big house. In the race to get ahead in one’s career and raise a family alongside, saving for retirement is barely a thought. While, some of these expenditures are important and cannot be done away with or postponed, for e.g. education of one’s children – an expenditure which simply cannot be compromised on. Generally people who plan for retirement goal and invest in mutual funds or insurance plans, sometimes they have to withdraw for the expenses of child education, child marriage, for some other requirement. Doing this they will short of funds at retirement. However, many of these expenses can be pruned or postponed to maintain one’s savings for the later age and stage of life. It is often noted that the purchase of a large asset like a house or a car during this life stage takes away significant savings and creates liabilities that eat away a chunk of the regular income. Therefore everyone should priorities of financial goals and accordingly to invest money. CFP Level 2 - Module 1 - Retirement Planning - India Page 8

1.6 Late Marriages and subsequent goals blur usual Life Stages A normal human being has several life stages- infancy, early childhood, adolescence, adulthood and old age. The average age at which Indians get married has gone up in the past 20 years. The average age of marriage for an Indian male that used to be in the range of 22-25 years in the 1990s is estimated to have gone up to 27-30 during recent times. Late marriages have compounded the problems of savings and spending patterns for the Indian couple. Buying a house, buying or upgrading a car, traveling, medical expenses, bearing and raising children, putting them through school and college, their marriage, parental health and medical care due to old age - pushes out the entire life cycle of one’s basic objectives to the age of 50-55. By this time, the individual is physically less capable of working himself and realizes that he is closer to his last life stage – old age or retirement period. This is the time most people scamper to get their resources together and seek help, which is often too close to the beginning of their consumption period – i.e. retirement often leading to a diminished quality of retired life over one’s entire working lifetime. lot of Indian parents tend to focus on their children to be their most important goal - the education of their children, their marriages, buying a house or other material things for them in order to “settle them down” make them often keep their own retirement and medical needs in the old age, at lower priority Although it is an individual’s choice to priorities one goal over the other,[1] [SB2] it is up to an adviser to raise his client’s attention in this area and provide data-driven guidance to bring some focus to his own later-stage needs. An understanding of the individual’s sensitivities and the priorities is necessary to guide him in an informed, mathematical yet sensitive manner to balance the current needs of the family with the future needs of their own requirements without the need to depend on anyone for the later years. CFP Level 2 - Module 1 - Retirement Planning - India Page 9

Chapter 2: Pension Reforms in India Old Age Social and Income Security (OASIS) Project 1.0 Project OASIS (Old Age Social and Income Security) In India, the Ministry of Social Justice and Empowerment is entrusted with the nodal responsibility for care of older persons and concerned with the issues of ageing, health and income security during old age. However, the Ministry realises that poverty alleviation programmes alone cannot provide a solution to the income and social security problems of the elderly. For instance, providing a Rs.100 per month old age pension to the projected 175 million population of the elderly in 2025, would translate into an annual outflow of over Rs.21, 000 crore for the Government. As a culmination of this growing concern, in August 1998, the Ministry commissioned the national Project titled “OASIS” (an acronym for Old Age Social and Income Security) and nominated an 8 member Expert Committee to examine policy questions connected with old age income security in India. The Project OASIS Expert Committee was mandated to make concrete recommendations for actions that the Government of India can take so that every young worker can build up a stock of wealth through his or her working life, which would serve as a shield against poverty in their old age. The research and recommendations under Project OASIS had a twin focus: (1) that of further improving existing provisions, and, (2) to devise a new pension provision for excluded workers who are capable of saving even modest amounts and converting this saving into an old age income security provision. The interim Report on reforms to the existing provisions was submitted to the Ministry of Social Justice and Empowerment in February 1999, followed by another report in January 2000. 1.1 Objective of the Report The objective of this Report is to recommend a pension system which can be used by individuals spread all over India, which enables them to attain old age security at the price of modest contribution rates through their working career. It is simple and convenient to use and CFP Level 2 - Module 1 - Retirement Planning - India Page 10

has the capability for converting modest contributions into reasonably large and comfortable sums in an almost risk-free manner for old age security. 1.2 Goals It is clear that anti-poverty programs will simply not suffice in addressing the problem of old age income. The sheer number of the elderly is too large, and the resources with the State are too small. The economic security during old age should necessarily result from sustained preparation through lifelong contributions and the central values that a pension system should emphasise are self-help and thrift. In this context, the goals to be achieved through the recommendations made in the report are as under: (1) To establish an institutional infrastructure for an efficient pension system. (2) To evolve a simple and affordable pension system for the workers in the un-organised sector. (3) Not to have an exclusive focus on tax incentives as a vehicle to encourage pension savings. (4) To have a sound pension planning which can be achieved by two factors: (a) by obtaining continuous, uninterrupted accumulations and (b) by using sound fund management to achieve the highest possible rates of return. Once these two ingredients are in place, the arithmetic of compound interest over multiple decades generates remarkable income security from even modest flow of savings. (5) To improve the rate of return without sacrificing long-term safety of funds by appropriate modifications in investment guidelines, and by entrusting funds to professional managers. (6) To have sound governance and sound pension system design. From a political economy perspective, a large stock of pension assets is a dangerous thing. Pension programs face large political risk. Pension systems in all countries have faced pressures from a host of special interest groups who seek to obtain “minor” alter- ations of pension-related policies in order to benefit themselves. (7) To obtain low administrative costs, nation-wide collection, and adequate simplicity for participation by millions of people with highly limited financial sophistication. The challenge also lies in obtaining freedom from fraud, and in resisting the pressures which seek to apply pension assets to further any agenda other than that of old age income security of members. CFP Level 2 - Module 1 - Retirement Planning - India Page 11

(8) To encourage regular savings, however small they may be. Research commissioned by Project OASIS shows that regular savings at the rate of between Rs.3 to Rs.5 per day through the entire working life easily suffice in escaping the poverty line in old age provided the pension assets are invested wisely. (9) To strive towards creating an equitable environment and simplified provisions to encourage universal coverage both for salaried employees as well as self-employed persons. (10) To make an enormous difference in the form of removing millions of people from the ranks of the destitute elderly in the years to come. Each additional person who is able to plan for old age income security is one less from the ranks that require the minimum support safety net in old age. This powerful motivation is the central inspiration for this Report. 2. Recommendations of Project OASIS 2.0 A New Pension System The new pension system should be based on individual retirement accounts (IRAs). An individual should create this account; have a passbook where he can see a balance that is his notional wealth at that point in time; he should control how this wealth is managed; this account should stay with him regardless of where he is or how he works. He would make contributions towards his pension into this account through his working life (whether employed in the organised sector or not), and obtain benefits from it after retirement for the rest of his life. 2.1 Individual Retirement Account A person will open a single Individual Retirement Account (IRA) with the pension system at as early a point in his life as possible. The account will provide the individual with a unique IRA number that will stay with the individual through life. The account would stay with the individual across job changes, spells of unemployment, and can be accessed at any location in India. The individual would always have access to an account balance statement showing his assets. All through, the individual would be empowered in having control of how his pension assets should be managed. Finally, upon retirement, the individual would be able to use his pension assets to buy annuities from annuity providers, and obtain a monthly pension. CFP Level 2 - Module 1 - Retirement Planning - India Page 12

2.2 Minimum Contribution The individual would save and accumulate assets into this account in his working life, subject to a minimum of Rs.100 per contribution and Rs.500 in total accretions per year. Individuals would be free to decide the frequency of accretions into their accounts; there will be no pressure to make a fixed monthly contribution. 2.3 Regulator y Framework In this entire process, a sound regulatory framework would give individuals an umbrella of safety with respect to problems of risk management and prevention of fraud. 2.4 Points of Presence (POPs) A key feature of the system described ahead is a high ease of access to the pension system through myriad Points of Presence (POPs) which would be located all over India and will include post offices, bank branches, etc. The individual would be able to visit any POP in India (not just the POP where he had opened the IRA) and conduct transaction on his individual retirement account. Every POP would exhibit identical features, processes and procedures. These transaction would be extremely simple and convenient, so as to require minimal knowledge about the financial sector. 2.5 Full Portability Individual accounts imply full portability: i.e. the individual would hold on to a single account across job changes across geographical locations. Individual accounts will also give individuals the opportunity to alter their risk profile in the life cycle in an optimal fashion (from high-risk, high-return investments at a young age to a low-risk, low-return portfolio when approaching retirement) if they so desire, while allowing them full freedom and flexibility in making their own choices. Individual accounts also interpret individual accumulations as individual wealth; they eliminate the free-rider problem of collectivist programs. The accumulation of retirement assets, in a form which is manifestly visible as individual wealth, helps reduce the political risks that many pension systems have suffered from. The Maintenance and Welfare of Parents and Senior Citizens Act passed in 2007 - Ensuring need based maintenance of parents and senior citizens, revocation of transfer of property by senior citizens in case of negligence by the relatives, penalties and legal implications for abandonment of senior citizens, establishment of old age homes, provision of medical facilities and availability of security for senior citizens and the protection of life and property. CFP Level 2 - Module 1 - Retirement Planning - India Page 13

7 different ministries under the government issued different provisions within their own policies to accommodate the provisions of this policy - The Ministry of Social Justice and Empowerment implemented a scheme to provide senior citizens with basic amenities like shelter, food, medical care and entertainment opportunities, the setup of old age homes, continuous care homes, mobile Medicare units, care centres for Alzheimer's and dementia patients etc. Ministry of Health and Family Welfare launched the national programme for health care of the elderly to provide dedicated health care facilities to the elderly people through state public health delivery systems The Ministry of Finance issued instructions to the insurance industry allowing entry into health insurance till 65 years of age and tax benefits to a senior citizen for taking up such schemes. It also gave a senior citizen higher rate of exemption on his tax limits, higher provision for medical insurance premium being paid under section 80D, standard deduction under section 80DDB for treatment of specified diseases and exemption from paying advance tax if there is no business income. The Ministry of Rural Development provides old age pension under the Indira Gandhi old age pension scheme of Rs. 200 per month to persons in the age group of 60 to 79 years and Rs. 500 per month to persons of 80 years and above and belonging to the below poverty line criteria as set by the Government of India. Ministry of Railways provides facilities like concessional basic fare for all classes on trains, no proof of age required and the ability to choose lower berth for senior citizens The Ministry of Home Affairs also has issued advisories to police personnel and staff to regularly visit senior citizens in the area checking on the safety & security, verification of domestic help and setting up of a toll free senior citizen helpline Under the Ministry of Civil Aviation’s instructions, Air India offers 50% discount for senior citizens on the highest economy class basic fare. Hence post implementation, citizen A could experience the following benefits –  People who are working in the organized sector and in government sector have National Pension System for getting regular pension during post retirement life.  Retirement benefit funds like CFP Level 2 - Module 1 - Retirement Planning - India Page 14

o Employees’ Provident fund o Employees’ pension scheme o Employees’ Deposit Linked Insurance Above benefits are given to an employee who is covered under Emplyee’s Provident Fund and Miscellaneous Act 1952. In provident fund employee and employer both contributes therefore employee gets very good corpus at retirement age.  Since a portion of the savings went into Employee pension scheme, some pension was ensured for Citizen A post retirement  Employee is given permission to withdraw from funds from his provident fund for important goals such as education of children, health expenses, housing requirements, children’s marriage etc.  In case an employee loss job or suffer disability, he can withdraw from his provident fund with waiting for any restriction.  Complete withdrawal from provident fund at least after 5 years, it will tax free.  People who are working in unorganized sector can open Public Provident Fund.  Citizen A once he has crossed the age of 60 years qualifies for lower slab rates of income tax, higher interest on normal and tax-free deposits, senior citizen’s savings schemes, exemption from payment of advance tax*, higher exemptions for payment of medical insurance, non- deduction of TDS*, concessions on rail and air travel, etc. The increase in life expectancy and the reduction in birth rates is taking India towards where most large developed economies stand today – a higher number of aged population. Project OASIS is a first comprehensive examination of policy questions connected with old age income security that endeavor to help the government take decisions today to deal with this problem of the future. The purpose of the project was to make concrete recommendations for the government of India today so that every youth can build his retirement Corpus throughout his working life and avoid being dependent or destitute when he gets to his old age. CFP Level 2 - Module 1 - Retirement Planning - India Page 15

The challenge was not to force Indians to save more in a provident fund or other such social welfare schemes – India already has a high employee contribution rate to the provident fund. The policy aimed at making this better, more efficient and accessible to the end user. Key policy recommendations as part of the project report were –  To limit early withdrawals on retirement funds  To ensure better financial and portfolio management of these corpus funds for superior returns  To ensure better customer service so as to be more accessible to the end user  To expand the coverage of the existing systems to reach more workers 2.6 Pension Scenario – State Governments, Autonomous Bodies and unorganized Sector A pension is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments. A pension may be a \"defined benefit plan\", where a fixed sum is paid regularly to a person, or a \"defined contribution plan\", under which a fixed sum is invested that then becomes available at retirement age The Government of India paid pension to all its employees under the CCS (Centralized Civil Services Pension Rules 1972) provided their joining date was before 1.1.2004 or their appointment was finalized before 1.1.2004 and joined service after that date. The employee has to complete 10 years of qualifying service for a pension. Those who joined on or after 1-1-2004 except defence personnel will come under the scheme National Pension System. They will not get inflation adjusted pension. These rules however do not apply to the employees under the Ministries of Railways and Defence – since they are governed by their own respective pension rules. Types of Retirement Benefit Plans Based on the discussion above, we can find that a person would have many financial needs that have to be met by the retirement benefit plan. All the needs can be taken care of if a corpus is built over the CFP Level 2 - Module 1 - Retirement Planning - India Page 16

working life of the person. Hence the benefit plans can be broadly classified into two types based on the way the quantum of money would accumulate at the end of the working life, which would then be used to provide the benefits sought. The amount that the benefit plan would provide on the date of retirement may be dependent on the amount of contribution made during the working life and its accumulated value or it may be dependent on the basis of a factor such as salary or the position occupied, number of years of working, etc at the time of retirement. Based on these the benefit plans would be classified into i) Defined Benefit Plans; ii) Defined Contribution Plans; and iii) Hybrid Plans (Combination of Defined Benefit and Defined Contributions Plans). Let us look at the salient features of these plans in detail: Defined Benefit (DB) Plans What are defined benefit plans? Defined benefit plan is a plan that specifies the benefits each employee receives at retirement or we can say that under a Defined Benefit Plan, employees are guaranteed a fixed benefit upon retirement. How do defined benefits plan work? A defined benefit plan guarantees you a certain benefit when you retire. How much you receive generally depends on factors such as your salary, age, and years of service with the company. Each year, pension actuaries calculate the future benefits that are projected to be paid from the plan, and ultimately determine what amount, if any, needs to be contributed to the plan to fund that projected benefit payout. Employers are normally the only contributors to the plan. But defined benefit plans can require that employees contribute to the plan, although it’s uncommon. You may have to work for a specific number of years before you have a permanent right to any retirement benefit under a plan. This is generally referred to as “vesting.”If you leave your job before you fully vest in an employer’s defined benefit plan, you won’t get full retirement benefits from the plan. How will retirement benefits be paid? Many defined benefit plans allow you to choose how you want your benefits to be paid. Payment options commonly offered include: CFP Level 2 - Module 1 - Retirement Planning - India Page 17

1. A single life annuity: You receive a fixed monthly benefit until you die; after you die, no further payments are made to your survivors. 2. A qualified joint and survivor annuity: You receive a fixed monthly benefit until you die; after you die, your surviving spouse will continue to receive benefits (in an amount equal to at least 50 percent of your benefit) until his or her death. 3. A lump-sum payment: You receive the entire value of your plan in a lump sum; no further payments will be made to you or your survivors. What are some advantages offered by defined benefit plans? Worker Advantages: 1. Workers can know in advance what their retirement benefits will be. 2. Employers, not workers, are responsible for providing retirement benefits, and the benefits are not dependent upon an employees’ ability to save. 3. Employees are not subject to investment risks due to fluctuations in the stock or bond markets. 4. A worker can earn a reasonable retirement benefit under a defined benefit plan, even if the worker has not been covered by a retirement plan earlier in their career. 5. A retired worker receives a guaranteed pension annuity, such as a monthly benefit, for life as does the workers surviving spouse, unless both the worker and spouse elect otherwise. 6. Death and disability insurance are typically provided under defined benefit plans. 7. Defined benefit plans can provide additional valuable benefits to workers, such as early retirement benefits, extra spousal benefits, disability benefits, benefits for past service, increased benefits, or cost-of-living adjustments. Employer Advantages: 1. By providing a predictable, guaranteed benefit at retirement that is valued by workers, a defined benefit plan can promote worker loyalty and help retain valuable workers. 2. An employer can provide a significant retirement benefit for workers, even older workers for whom no contributions have previously been made, or who did not or could not save for retirement earlier. CFP Level 2 - Module 1 - Retirement Planning - India Page 18

3. Defined benefit plans are flexible and can provide additional valuable benefits to workers. 4. An employer can design a defined benefit plan to accomplish organizational goals, such as offering enhanced early retirement benefits. 5. Defined benefit plan assets are collectively invested, which may result in higher investment returns. 6. While the employer bears the investment risks for the plan, favorable interest rates and economic conditions can reduce or eliminate an employers’ contribution, or make it possible to increase worker benefits at reduced or nominal costs. Note: 1. The better the investment performance the lower the contributions needed. 2. Benefit payable in futures is determined in the beginning. 3. Amount at retirement does not depend upon the amount set aside to fund the employer or the employee. Cost of the Defined Benefit Plan: 1. Contribution could vary time to time because of inflation and some other factors. 2. Regular review required. 3. Actuary would determined the liability and the investment required for the plan to generate sufficient funds. Disadvantages: 1. Not beneficial to employees who leave before retirement. 2. Difficult to understand by participant Defined Contribution Plans: Defined contribution plans (Also called a ‘Money Purchase Plan’) are retirement plans in which employees provide most or all of the funding (sometimes with a partial employer match and/or with discretionary profit- sharing contributions) by deferring a percentage of their salary. Once they retire, they have considerable flexibility in taking cash distributions. Defined contribution plans, are often thought of as 401K plans. This type of plan tends to be more beneficial to shorter tenure and/or CFP Level 2 - Module 1 - Retirement Planning - India Page 19

younger employees. Employees receive benefits based on salary, not tenure which may encourage employees to change jobs in order to receive access to lump- sum distribution from retirement accounts. Advantages: 1. Amount of contribution is known. 2. Participants can benefit from good investment results. 3. Easily understandable by participants. 4. Tax liability is deferred over the retirement age. Disadvantages: 1. Participants bear investment risk. 2. Difficult to build a fund for those who enter late in life. Difference between Defined Benefit Plan and Defined Contribution Plan Sr. No. Defined Benefit Plan Defined Contribution 1. 2. The quantum of the benefit on retirement The quantum of the benefit on retirement 3. of an employee is fixed either as an of an employee depends on the 4. absolute sum or as based on the length of accumulated value of the contribution service and salary drawn by the employee. made the employer or employee or both and hence is not fixed An Actuary has to be appointed to calculate the contribution and the quantum of Actuary is not appointed funding required The amount of contribution to be made by The contribution to be made by the the employer will depend upon the benefit employer is fixed either as an absolute sum payable, which is fixed and hence can vary or as a proportion of salary or wages tremendously. payable to the employee. The employer would not find this scheme to The employer would find these schemes his liability can vary from on valuation to rather easy to finance as he is quite aware the other putting a heavy strain on the of his liability and even at the time of pay CFP Level 2 - Module 1 - Retirement Planning - India Page 20

employer’s finance. revision or promotion of some employees the exact impact on the liability can be calculated accurately. The employee would prefer to have a The employee would not prefer this type 5. defined benefit scheme. of a scheme. Portability of Plans: 1. One of the effects of economic reforms is increase in private sector employment. 2. Now, employees switch jobs and are always on the lookout for greener pastures. 3. Hence, any plan that does not have the flexibility or portability is not advantageous for the employees. 4. Defined Benefit plan does not enjoy much portability. 5. The employee would like the benefits to be carried forward from one employer to another. 6. Only a DC plan offers easy portability – hence preference for the DC plans is on the increase. 7. Some recent trends are for more Defined Contribution retirement benefit plans. Hybrid (DB+DC) Plans: In addition to these two basic plans of “Defined Benefit” and “Defined Contribution”, there may be Hybrid Plans, though very rare, which are a combination of the benefits of both the above plans. In such plans, both the ends i.e. the rate or the amount of contribution and also the amount of future benefits to be made available to the beneficiary are fixed. Such plans are rare but do exist on account of social, political, economic or other compulsions. The statutory Employees Pension Scheme of the PF Authorities introduced in 1995 by the Central Government is an example of this “Hybrid Plan”. This pension scheme not only defines the contribution to be paid @8.33% and @1.16% of the salary of the employee covered under the scheme by the employer and the Central Government respectively but also defines the pre-determined benefits payable to the employee in the shape of pension after he qualifies for it. (The benefits of this scheme would be explained in detail in Chapter 5 of this module when the full scheme of statutory Provident Fund is discussed.) CFP Level 2 - Module 1 - Retirement Planning - India Page 21

Organized sector employees – Central government employees Two sets of schemes are applicable to Central government employees apart from those belonging to the Ministries of Defence and Railways- Appointed and joined before 1.1.2004 These employees are eligible to receive pension under the CCS 1972 rules. Employees under this segment can commute up to 40% of their pension amount. Minimum number of years of qualifying service has to be 10 years in order to qualify for pension. Commutation effectively means giving up part or all of the payment due as pension installments in exchange for an immediate lump sum payment. The remaining amount will be amortized into installments called monthly pensions. The formula for commutation is as below – Commuted Value of pension = 40% x Commutation factor x 12 Where, commutation factor will be as per the pensioner’s table and the reference age for the commutation factor that table will be the age on his next birthday Below is an example of the commutation factor table Age next Commutation value Age next Commutation value Age next Commutation Birthday expressed as Birthday Expressed as Birthday value expressed number of year's number Of year's as number of purchase purchase year's purchase 20 9.188 41 9.075 62 8.093 21 9.187 42 9.059 63 7.982 22 9.186 43 9.040 64 7.862 23 9.185 44 9.019 65 7.731 24 9.184 45 8.996 66 7.591 CFP Level 2 - Module 1 - Retirement Planning - India Page 22

25 9.183 46 8.971 67 7.431 26 9.182 47 8.943 68 7.262 27 9.180 48 8.913 69 7.083 28 9.178 49 8.881 70 6.897 29 9.176 50 8.846 71 6.703 30 9.173 51 8.808 72 6.502 31 9.169 52 8.768 73 6.296 32 9.164 53 8.724 74 6.085 33 9.159 54 8.678 75 5.872 34 9.152 55 8.627 76 5.657 35 9.145 56 8.572 77 5.443 36 9.136 57 8.512 78 5.229 37 9.126 58 8.446 79 5.018 38 9.116 59 8.371 80 4.812 39 9.103 60 8.287 81 4.611 40 9.090 61 8.194 Source: https://pensionersportal.gov.in/comm_table_6CPC.pdf In the event of the death of the family pensioner, the arrears of the pension is automatically payable to the eligible member of the family member next in line. Succession certificate can be provided to receive the arrears of the pension in case no eligible family member is available to receive the pension. List of eligible family members being: Spouse of the deceased retired employee Dependent son or daughter below 25 years of age Divorced or widowed daughter Page 23 CFP Level 2 - Module 1 - Retirement Planning - India

Besides the retirement pension paid by the central government, there are other types of pension also such as the Superannuation pension, Voluntary retirement for a government employee who has completed 20 years of service and wishes to retire early, family pension and extraordinary pension if the disablement/death of the employee has been attributed to government service. 2.7 Government – Decisive shifting away from Defined Benefit Schemes The Defined Contribution Pension System (National Pension System) All government employees who joined the Government Civil Services after 1.1.2004 became eligible for pension under The National Pension System instead of the Centralized Civil services regime. NPS is largely focused on one's retirement. While up to 60% of the maturity corpus can be withdrawn as a lump sum on maturity, the balance is compulsorily annuitized, i.e., balance is used to fund the annuity (pension) after retirement. This annuity is fully taxable in the year of receipt as income from other sources. 1. Portability – NPS does not have any Geographical restrictions. An account opened in any state of India can be accessed from all over the country. NPS corporate account is transferable between employers. 2. Flexible – NPS gives the subscriber the flexibility to choose the Fund Manager, Investment Option, Annuity Service Provider, etc. This gives you the control over your investments. 3. Economical – NPS is currently one of the cheapest investment products available. 4. Voluntary – NPS is voluntary product for citizens of India. Only for central and state Government employees, NPS is compulsorily under the fixed contribution scheme. Types and Tiers: NPS accounts are primarily of two types, Individual NPS account (All Citizen Model) and Corporate NPS account. In an Individual NPS account, the subscriber (Account holder) is the only contributor. All selections pertaining to Scheme preference, Investment choice, Annuity Service Provider, etc. Are done by the subscriber alone. Any citizen of India can voluntarily choose to open an Individual NPS account to avail tax benefits on investments and to ensure a fixed income post retirement. When a corporate chooses to offer NPS scheme to their employees as a retirement benefit plan, this is a Corporate NPS account. Any employee of a Company that is registered with a CRA for NPS can avail CFP Level 2 - Module 1 - Retirement Planning - India Page 24

Corporate NPS benefits. In such an account, the employee and the employer, both are contributing to the same NPS account. The employer makes a certain contribution to the employer's NPS account on his/her behalf. This employer contribution should not exceed 10% of the employee's Basic + DA. The employee too makes certain contribution to the same account. This ensures higher amount being contributed in the account and also gives better tax benefits to the employee. Subscribers have the option to open two types of NPS Accounts under the same Permanent Retirement Account Number (PRAN). These are called tiers in NPS:  Tier I: Contributions done to this account are eligible for additional tax deduction benefit of up to Rs. 50,000/- under section 80CCD (1B), over and above Rs.1,50,000/- u/s 80C. Withdrawals are restricted and subject to terms and conditions.  Tier II: Subscribers can invest an additional amount in Tier II NPS Account. Subscriber is free to withdraw his entire accrued corpus under Tier II at any point of time. In case subscriber has not contributed even the initial contribution towards Tier II a/c, it will be automatically deactivated as per process. No tax benefits are available in this account. Benefits: National Pension System (NPS) is a perfect solution for retirement planning. It provides old age income with reasonable market based returns. It is based on unique Permanent Retirement Account Number (PRAN) which is allotted to every subscriber for NPS. An NPS Account offers the following benefits:  Regulated: NPS is regulated by PFRDA (Pension fund regulator under Govt. of India)  Transparency: NPS account can be accessed online to make contributions and track investments.  Flexibility: The subscriber has the flexibility to choose the investment option, fund manager, Annuity Service Provider, Annuity Option.  Control: The subscriber has the control of his/her investments. This ensures that you can take calculated risks and ensure higher returns.  Long term returns: NPS is a long term investment plan. The minimum lock in period for NPS is 10 years. Hence the subscriber gets the benefit of compounding which ensures higher corpus on maturity.  Online presence: You can register and access your NPS accounts online making it very convenient to access and manage. Multiple features are made available online and also on the NPS application. CFP Level 2 - Module 1 - Retirement Planning - India Page 25

 Tax Benefits: NPS investments attract lucrative tax benefits. This ensures a yearly (immediate) saving. Following are the multiple tax benefits on NPS: Section Description 80 CCD(1) Individual Subscriber's contribution can clain tax benefit U/s 80 CCD(1) with in the overall ceiling of Rs. 1.5 lakh U/s 80 CCE 80 CCD(1B) Individual Subscriber's contribution upto Rs. 50,000 is eligible for tax exemption U/s 80 CCD(1B) 80 CCD(2) Corporate Contribution (Contribution made by the employer on behalf of the employee) made upto 10% of the employee's basic salary is eligible for tax exemption U/s 80 CCD(2) NPS Stakeholders: 1. NPS Trust The PFRDA (Pension Fund Regulatory and Development Authority) established the NPS Trust under the Indian Trusts Act 1882 and appointed a board of trustees wherein their responsibility is to take care of the funds of the NPS. The board of trustees have legal ownership over the trust’s funds. They have the following functions –  Execute the individual account holder’s pension account  Approving and monitoring audit reports, financial statements, compliance reports etc. which the intermediaries are required to submit to the Trust from time to time  Monitoring and evaluation of all operational activities and service level agreements as carried out by the various appointed intermediate agencies.  Protect and safeguard the interest of the subscribers of the NPS  Redressal of subscriber grievances and complaints CFP Level 2 - Module 1 - Retirement Planning - India Page 26

 Supervise the collection of any income due to the trust funds and claiming any repayments from tax. The NPS Trust is authorized by the PFRDA to carry out a monthly operational audit of the intermediaries such as the pension fund managers and also evaluate the performance of the appointed agencies every quarter. 2. Trustee Bank The NPS Trust holds an account with the trustee bank that is responsible for all NPS Trust fund related activities – deposits, withdrawals, pension disbursals. Currently the trustee bank is Axis Bank. The trustee bank is responsible for the day-to-day fund flow and other banking activities of the NPS Trust. It receives funds from all nodal offices and redirects them to the pension fund managers/annuity services providers. It also transfers funds to various entities during the settlement process and reconciles the balances daily with all CRA related accounts. The bank also provides periodic reports for the review and audit related activities of the trust. Retirement Advisers and Aggregators A Retirement Adviser (RA) is any person- an individual, partnership firm, body corporate, registered trust or society who desires to provide retirement advisory services on the National Pension System or any other such pension scheme regulated by the PFRDA. The NPS-Lite was introduced particularly to serve the interests of the Low Income Group subscribers who are economically disadvantaged and cannot bear heavy charges on their investment accounts An Aggregator is a link between the subscriber and the NPS-lite system – ensuring all communication flows seamlessly between the two entities. Aggregators function as part of a group servicing endeavor to reach out to and service these low income citizens. These aggregators function as the contact point for subscriber service requests, contributing collection and disbursal of withdrawals/pension amounts etc. CFP Level 2 - Module 1 - Retirement Planning - India Page 27

Several banks such Axis Bank, Allahabad Bank, Bank Of Maharashtra and other non-bank entities such as LIC housing finance limited, Jagran Microfin Pvt ltd etc. are examples of aggregators. Pension Fund Regulatory and Development Authority (PFRDA) is a pension regulator which was established by the Government of India on August 23, 2003. PFRDA is authorized by Ministry of Finance, Department of Financial Services. PFRDA promotes old age income security by establishing, developing and regulating pension funds and protects the interests of subscribers in schemes of pension funds and related matters. Central Recordkeeping Agency (CRA) as the sector regulator PFRDA has appointed Karvy Computershare & National Securities Depository Limited (NSDL) to offer NPS. Below are some of the functions of the CRA-  Registration of subscribers and issuance of the PRAN, dispatch of the PRAN card and welcome kit  Maintenance, updation, monitoring of subscriber records  Dispatch of statements of accounts to the subscribers and providing them with online access to their accounts  Processing of exit/withdrawal and other such service requests  Receipt and redressal of subscriber complaints The CRA operates via the CRA-FC (Facilitation centers) which are sub- entities appointed by the CRA who have branches in different parts of the country to provide services to the nodal offices. The CRAs are regulated by the PFRDA (Central Recordkeeping Agency) regulations 2015 and are subject to monthly evaluation and monitoring by the NPS trust for their functional and operational activities. Point Of Presence (POP) - The first point of interaction between the subscriber and the NPS architecture. POP shall facilitate the subscriber registration and submission of contributions. HDFC Bank Ltd. is registered with PFRDA as a Point of Presence (POP). CFP Level 2 - Module 1 - Retirement Planning - India Page 28

Pension Fund Manager (PFM) The contributions invested in NPS are managed by 8 Pension Fund Managers (PFM) appointed by PFRDA. The Subscriber can choose any one of the below given entities:  HDFC Pension Management Company Limited  UTI Retirement Solutions Limited  Kotak Mahindra Pension Fund Limited  LIC Pension Fund Ltd  SBI Pension Funds Private Limited  ICICI Prudential Pension Funds Management Company Limited  Birla Sunlife Pension Management Limited One can change one’s PFM once in a financial year Of the above, SBI, LIC & UTI are the only fund managers that manage the contributions of the government employees under the NPS Annuity Service Providers After completion of 60 years of age, the subscriber will have options to start Annuity. Below are Life Insurance Companies registered with PFRDA that offer Annuity:  HDFC Standard Life Insurance Company Limited  Star Union Dai-Chi Life Insurance Company Limited  Life Insurance Corporation of India Limited  ICICI Prudential Life Insurance Company Limited  SBI Life Insurance Company Limited Charges: Intermediary Charge Head Service Charges* Initial Subscriber Rs. 200/- Charges by Bank - Point Of Registration Presence - POP (Maximum Permissible Charge for each Initial Contribution 0.25% of the initial contribution Subscription) amount from subscriber subject to a Any subsequent minimum of Rs.20/- and a maximum CFP Level 2 - Module 1 - Retirement Planning - India Page 29

Contribution of Rs.25,000/- All Non-Financial Rs.20/- Transactions e-NPS (for subsequent 0.10% of the contribution. Min. Rs. 10/- & Max. Rs. 10,000/- (Only for contributions) NPS- All Citizen & Tier- II accounts) Charges by Bank - Point Of Rs. 50/- per annum (Only for NPS- All Presence - POP (Through Persistency Citizen Model) cancellation of Units) Permanent Retirement Account Number (PRAN) Rs.40/- M/s NSDL e-Governance Opening Charges Infrastructure Ltd (1st CRA) PRAN Annual Rs. 95/- Maintenance Charges Charge per transaction Rs. 3.75/- PRA Opening Charges Rs. 39.36/- M/s Karvy Computershare Pvt Ltd Annual PRAN (2nd CRA) Maintenance cost per Rs. 57.63/- account Charge per transaction Rs. 3.36/- Fund Management Charges (FMC) 0.01% p.a. of total accumulated amount Note : *The charges are subject to revision by Regulators. *Taxes as applicable. Investment Option: Subscribers have the option to select allocation pattern for their investment across various asset classes. Active Choice: This option allows the subscriber the freedom to design the portfolio among 4 asset classes as below: CFP Level 2 - Module 1 - Retirement Planning - India Page 30

 Equity (E): This is a 'High risk – High Return' option as the funds are invested in equity Subscriber can choose to invest up to 75% in this class  Corporate Bonds (C): Funds are invested in fixed income bearing instruments which offer medium returns  Government Securities (G): Funds are invested only in Government Securities  Alternate Assets (A): Funds are invested in real estate bonds and infrastructure projects. Maximum capping is 5% investment since this is a very high risk investment. Under Auto Choice, the asset allocation of the subscriber’s fund follows a life-cycle based approach reducing the allocation to equities with the subscriber’s increasing age. Under auto choice, the subscriber can choose one of the three options for Life Cycle– Conservative Life Cycle-takes a conservative approach capping equity exposure to a maximum of 25% Moderate Life Cycle- this is the default option with the equity exposure being capped at maximum 50% Aggressive life cycle- under this fund, the equity allocation can go up to 75% CFP Level 2 - Module 1 - Retirement Planning - India Page 31

Under Active Choice: Subscriber can enroll for NPS through the online application mode from the convenience of his home / office. The prime objective of the scheme is to provide all citizens of India with an attractive long term savings avenue to plan for retirement through safe and reasonable market based returns. The account can be opened by all Indian Citizens between 18 to 60 Years. Steps for online account opening:  Subscriber can enroll for NPS by clicking on 'Apply Now' option under NPS (National Pension System)  Subscriber will get online form, which needs to be filled with mandatory fields.  Receipt number for subscriber registration (account opening) will be generated. There will be provision to complete the registration (account opening) later based on receipt number search.  Subscriber's e-KYC will be done through Aadhaar (OTP based authentication).  Subscriber enters remaining details like Bank details, scheme details, nominee details etc.  Subscriber needs to upload photograph and signature (Cheque and PAN for Tier II). CFP Level 2 - Module 1 - Retirement Planning - India Page 32

 Subscriber will enter the contribution amount (this is the amount subscriber wants to invest in NPS) and click for payment.  Subscriber will be directed to online payment platform wherein subscriber will complete the payment through HDFC Bank Net Banking.  On successful payment, PRAN will be allotted to the subscriber and PDF form will be generated based on data given. This can be saved for reference and need not be sent separately (This is only applicable for Aadhaar based NPS account opening).  NPS Account opening Contribution: Particulars Tier I Tier II Minimum Contribution required at the time of account opening Rs.500/- Rs.1000/- Minimum Subsequent Contribution amount required Rs.500/- Rs. 250/- Minimum contribution required per year Rs.1000/- NIL Minimum number of contributions required in a year 1 NIL NPS Models There are 4 different types of models/variants of the NPS system 1. All Citizen Model 2. Government Sector Model 3. Corporate Model 4. NPS Swavalamban/NPS Lite/Atal Pension Yojana 1. All Citizen Model The All Citizen Model is for the people who are not working as an employee – such as self- employed individuals, professionals, business owners etc. The Central government had initially issued the NPS for the government employees in 2004. On first AY, 2009, the NPS was made available to all citizens of India. Any citizen of India, resident CFP Level 2 - Module 1 - Retirement Planning - India Page 33

as well as non-resident between the age of 18 and 65 years of age can apply for an NPS account. 2 & 3. Government Sector and Corporate Model For the Central and State Government employees who receive their pension post retirement from the government, the government model applies. Except for the Armed Forces, this model applies to all government employees who have joined service after 1st January, 2004. Under the government model, the employee contributes 10% of his salary to the pension fund with a matching contribution from his employer, in this case the government, to the fund. From 01.04.2019, the employer’s contribution has been enhanced to 14% in case of central Government employees The Corporate sector employees, as the name suggests, fall under the corporate model Any entity registered under the companies Act, cooperative act, Central or state Public sector enterprises, partnership firm, LLP, trust or Proprietorship firm may join the NPS. The employees of the entity will be registered with the NPS Trust as subscribers. The rights of subscribers under the corporate model also remain intact – with the freedom to operate one’s individual account, appoint nominees, change or switch asset allocation, change pension fund manager, and so on. The employer can co-contribute to the employees’ pension funds and claim this as a business expense in their tax filing. Employee’s contribution qualify for tax benefit under section 80C. 4. Atal Pension Yojana (APY) The socio-economically disadvantaged citizens fall under the purview of the Atal Pension Yojana model. These are the low income group citizens between the ages of 18 to 40 years who receive support from the government as a share in their pension contributions. Under the APY, the government guarantees a monthly pension for the subscribers in the range of Rs. 1000- Rs. 5000 – the subscriber can choose the amount of pension required on retirement and the contributions can be adjusted accordingly. The age of entry in this scheme from 18 to 40 and age of exit and start of pension is 60 years. Therefore the minimum period of contribution for the subscriber has to be 20 years. CFP Level 2 - Module 1 - Retirement Planning - India Page 34

An age-wise indicative table of contribution levels under APY is as below – Entry Total Years Monthly Contribution Amount Required Age of (years) Monthly Monthly Monthly Monthly Monthly Contribution Pension Pension Pension Pension Pension 18 of Rs. of Rs. of Rs. of Rs. of Rs. 19 42 29 41 1000 2000 3000 4000 5000 21 40 42 84 126 168 210 22 39 23 38 46 92 138 183 228 24 37 25 36 50 100 150 198 248 26 35 27 34 54 108 162 215 269 28 33 29 32 59 117 177 234 292 30 31 31 30 64 127 192 254 318 32 29 33 28 70 139 208 277 346 34 27 35 26 76 151 226 301 376 36 26 37 24 82 164 246 327 409 38 23 39 22 90 178 268 356 446 40 21 20 97 194 292 388 485 106 212 318 423 529 116 231 347 462 577 126 252 379 504 630 138 276 414 551 689 151 302 453 602 752 165 330 495 659 824 181 362 543 722 902 198 396 594 792 990 218 436 654 870 1087 240 480 720 957 1196 264 528 792 1054 1318 291 582 873 1164 1454 CFP Level 2 - Module 1 - Retirement Planning - India Page 35

Gratuity: An employee is eligible to receive gratuity once he/she completes 5 years of working with an organization. It is a benefit paid under the Payment of Gratuity Act 1972. It does not require any contributions from the employee. This is a payment purely from the employer as an expression of his gratitude to the employee for having served long enough with his company. However it can be paid earlier if an employee dies or becomes disabled during the course of the employment, even before completing 5 years of service. 2.8 Mandatory contributory system Employee provident fund: Employees contribute some part of their salary ( basic pay + dearness pay ) or you can say some % of salary in provident fund, employer may also contribute in the same fund, once employees retire or leave the organization will get their provident fund with interest. If withdrawal takes place after 5 years, the whole provident fund is tax free. Employee Pension Scheme- EPS 1995 was launched by Employee Provident Fund Organization (EPFO) under Employee’s Provident Fund and Miscellaneous provision Act 1952. It is a good scheme for private sector employees for receiving pension at age 58. Contribution is done by only employer. He contributes 8.335 of salary but salary subject to maximum Rs.15000. Central Government also contributes 1.16% of salary but salary subject to maximum of Rs.15000. To understand the above concepts we are taking an example, there are three types of employees – A, B and C A joined a government job in 1998 B joined a government job in 2006 C works for the private sector CFP Level 2 - Module 1 - Retirement Planning - India Page 36

When A retires, he will get tax free gratuity subject to maximum Rs.20 lacs. He will get guaranteed pension which will be 50% of his last drawn basic along with dearness allowance. He will be given permission to commute his pension upto 40%, which will be restored after 15 years of pension life. When B retires, he will get the benefits of the Defined Contribution System as on and after 1-4- 2004 whosoever joined government job except defense personnel. He will get pension from his account of NPS (National Pension System) which will depend on accumulated corpus in his NPS account and rate of interest rate offered by Life Insurance Company at the time of retirement. He will get Employee Provident fund, Gratuity and leave encashment. When C retires, he will get pension from his EPS scheme which is almost not more than 12500 if covered under EPF act 1952. If he has NPS account, will get the same as B would get. CFP Level 2 - Module 1 - Retirement Planning - India Page 37

Chapter 3: Retirement Products in India Introduction On account of the difficulties faced by the defined benefit schemes, whether statutory or non- statutory and whether run by the Government or private bodies, the world over the trend is to adopt defined contribution schemes and even shift from the defined benefit pattern to a defined contribution one. It has already been seen that the defined contribution system has many advantages from the contributor’s point of view and is a far more transparent system. Accounting Standards have also made it mandatory to provide for the liabilities of future benefits payable to the employees in the books of accounts before preparing Profit and Loss Account and the Balance Sheet. The purpose is to tell the employer as to how much financial liability his company is carrying on its shoulders and the prudent financial principles demand that such liabilities should be funded as and when they arise. In the defined contribution schemes, this difficulty generally does not arise because the employer knows the amount of contribution to be made as in the case of Employees’ PF and thus meets his liability. In this Topic, we shall study all defined contribution plans relating to employee benefits. Since the Central Government has scrapped its GPF and defined benefit pension scheme for new employees except the armed forces with effect from 1-1-2004, this should be kept in mind while studying GPF scheme. The effect of this notification on the defined benefit pension scheme for the Central Government shall be discussed in next topic. Defined Contribution Plans In the earlier section, we have discussed types of retirement plans viz. defined benefit plans and definite contribution plans. We have also studied the characteristic features and advantages– disadvantages of defined contribution plans. Whenever we refer to defined contribution plans, the reader must remember that “Under DC schemes, the contributions are usually expressed as a percentage of salary or total earnings. The rate of contribution could be a flat rate or could be tiered by some other consideration like length of service or seniority etc. But the final benefit payout is never fixed and would be based on the accumulation of the contributions made”. In this section, we will study the defined contribution plans available in the Indian market, their key features, their functioning, funding and withdrawal norms. In India, there is no social security and the CFP Level 2 - Module 1 - Retirement Planning - India Page 38

choice available to the working class is very limited, for example, State and Central government employees are covered under General Provident fund (GPF) and industrial workers and all other establishments under Employees’ Provident Fund (EPF). Thus, the employees have to join one of these schemes depending on where they are employed and do not have choice to choose any one of them unlike developed countries. Provident Fund The Provident Fund is a retirement benefit scheme, under which a stipulated sum is deducted from the salary of the employee as their contribution towards the fund. The contributions of the employer and the employee are then invested in government securities. The interest earned on those securities is credited to the Provident Fund account. Thus, the corpus in an account consists of the employee’s and the employer’s contributions and the interest on these contributions. The accumulated sum is paid to the employee at the time of his/her retirement or resignation (subject to certain conditions). If the employee were to die before getting the accumulated balance, the corpus would be given to the employee’s legal heirs. Under section 80C of the Income Tax Act, the employee gets a tax deduction. The three types of Provident Funds are: Statutory Provident Fund (SPF) The history of the Provident Fund legislation in India dates back to the year 1919. Various provident fund schemes were first framed u/s 96-B of the Government of India Act, 1919. Later, the Provident Fund Act, 1925 was enacted to amend and consolidate the laws relating to both Government and other Provident Funds. A statutory provident fund is set up under the provisions of the Provident Fund Act, 1925. This fund is maintained by Government and Semi Government organizations, local authorities, railways, universities and recognized educational institutions. Retired employees normally will not be concerned with such funds after their retirement. Employees’ Provident Fund Scheme, 1952 Except for a Statutory support of contributory P.F. for coal mine workers, there was no provision of post retirement benefits to industrial & commercial workers before 1952. With the increasing participation of private sector in the industrial development and growth of new enterprises, the government introduced a provident fund scheme in the early 50s known as Employees Provident Fund scheme, providing for accumulation of certain share of the wages contributed by the employees and CFP Level 2 - Module 1 - Retirement Planning - India Page 39

employers during the working life. The accumulation was paid as lump sum on retirement. The Employees Provident Fund Organisation created by the Employees Provident Fund and Miscellaneous Provisions Act 1952 (PF Act), runs the scheme with its network of officers spread across the country. The Board of Trustees formed under the PF Act manages the corpus. The Ministry of Finance fixes the return on the corpus to each employee on an annual basis. There are three schemes in force as of now:- 1. Employees Provident Fund Scheme (E.P.F. Scheme), 1952 2. Employees Deposit linked Insurance Scheme (EDLI scheme). 1976 3. Employees Pension Scheme (E.P.S.), 1995 All are funded Schemes Employee Definition “Employee” as defined in Section 2(f) of the Act means any person who is an employee for wages in any kind of work manual or otherwise, in or in connection with the work of an establishment and who gets wages directly or indirectly from the employer and includes any person employed by or through a contractor in or in connection with the work of the establishment. Membership All the employees (including casual, part time, Daily wage contract etc.) other than an excluded employee are required to be enrolled as members of the fund the day, the Act comes into force in such establishment. Definition of Basic Wages “Basic Wages” means all emoluments which are earned by employee while on duty or on leave or holiday with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash, but does not include: a. The cash value of any food concession; b. Any dearness allowance (that is to say, all cash payment by whatever name called paid to an employee on account of a rise in the cost of living), house rent allowance, overtime allowance, CFP Level 2 - Module 1 - Retirement Planning - India Page 40

bonus, commission or any other allowance payable to the employee in respect of employment or of work done in such employment. c. Any present made by the employer. Salary: Basic Wages + D.A.+ Retaining Allowance + Cash value of food concession. Excluded Employee “Excluded Employee” as defined under para 2(f) of the Employees’ Provident Fund Scheme means an employee who having been a member of the fund has withdrawn the full amount of accumulation in the fund on retirement from service after attaining the age of 55 years; or an employee, whose pay exceeds Rs. 15000 per month at the time, otherwise entitled to become a member of the fund. Withdrawal facilities Employees’ Provident Fund Scheme takes care of following needs of the members and provides withdrawal facilities for the following purposes: (i) Retirement (ii) Medical Care (iii) Housing (iv) Family obligation (v) Education of Children (vi) Financing of Insurance Polices Annual Statement of Account As soon as possible and after the close of each period of currency of contribution, annual statements of accounts will be sent to each member through of the factory or other establishment where the member was last employed. The statement of accounts in the fund will show the opening balance at the beginning of the period, amount contributed during the year, the total amount of interest credited at the end of the period or any withdrawal during the period and the closing balance at the end of the period. Members should satisfy themselves as to the correctness of the annual statement of accounts and any error should be brought, through the employer to the notice of the Provident Fund Office within 6 months of the receipt of the statement. CFP Level 2 - Module 1 - Retirement Planning - India Page 41

Employees’ Provident Fund Interest Rate The rate of interest is fixed by the Central Government in consultation with the Central Board of trustees, Employees’ Provident Fund every year during March/April. The interest is credited to the members account on monthly running balance with effect from the last day in each year. Returns on EPFO funds are set annually by the Govt. and are annual around the budget time. The rate of interest for the year 2018-19 is 8.65% p.a. Benefits A) A member of the provident fund can withdraw full amount at the credit in the fund on retirement from service after attaining the age of 55 years. Full amount in the provident fund can also be withdrawn by the member under the following circumstances: A member who has not attained the age of 55 year at the time of termination of service. A member is retired on account of permanent and total disablement due to bodily or mental infirmity. On migration from India for permanent settlement abroad or for taking employment abroad. In the case of mass or individual retrenchment. B) In case of the following contingencies, withdrawal of the proceeds of the provident fund at the credit of the member will be allowed after his completing a continuous period of subscription to the fund of not less than two months, immediately preceding the date on which the application for withdrawal is made by the member: Where employees of closed establishments are transferred to other establishments, which are not covered under the Act. Where a member is discharged and is given retrenchment compensation under the Industrial Disputes Act, 1947. Withdrawal before retirement A member can withdraw upto 90% of the amount of provident fund at credit after attaining the age of 54 years or within one year before actual retirement or superannuation whichever is later. CFP Level 2 - Module 1 - Retirement Planning - India Page 42

Accumulations of a deceased member Amount of Provident Fund at the credit of the deceased member is payable to nominees/legal heirs. Transfer of Provident Fund account Transfer of Provident Fund account from one region to another, from Exempted Provident Fund Trust to Unexampled Fund in a region and vice-versa can be done as per Scheme. Nomination The member of Provident Fund shall make a declaration in Form 2, a nomination conferring the right to receive the amount that may stand to the credit in the fund in the event of death. Rate of contribution for EPF Scheme By the employee: @12% of the EPF Salary every month. (Basic + DA) If DA forms part of retirement benefits Full amount of the employee’s contribution goes to his Provident fund account. Contribution by the Employer: @12% of the EPF Salary every Month But the employer’s Contribution is bifurcated @8.33% of the salary up to Rs. 15000 goes to Employee’s pension Scheme, balance to the EPF account. This fund is maintained by Central Provident Fund Officer under Ministry of Labor and the rate of interest is decided by the government. As per the latest changes in the Employee Pension Scheme that are effective since 1st September 2014, the EPF is distributed as 12% of the employee’s salary goes into the EPF account and 12% of the employer's salary is divided into 3.67% for EPF, 8.33% for EPS. Employer also pays for 0.5% for EDLI 0.85% as EPF admin charges and 0.01% as EDLI Admin charges. The minimum pension under EPS is Rs 1000 and EPF is mandatory for those employees drawing a salary less than Rs 15,000 a month. EDLI cover for each employee has been raised to Rs.6,00,000 maximum CFP Level 2 - Module 1 - Retirement Planning - India Page 43

Withdrawals A member can withdraw for the following purposes if he has completed 5 years service and his own share of contribution with interest is not less than Rs. 1000. 1. For purchase of a site/plot for construction of a house the withdrawal can be least of following: a. The cost of site/plot or; b. 24 months salary (Basic + D.A.) or; c. Employee’s and employer’s contribution with interest 2. For the alteration or improvements to dwelling house the withdrawal is least of following: a. 12 months salary (Basic + D.A.) or; b. The cost of alteration or; c. Employee’s and employer’s contribution and interest thereon 3. For Ready built house or construction of a house, withdrawal is least of following: a. 36 months salary or; b. The cost of the house or; c. Employee’s and employer’s contribution and interest thereon. Advances for Repayment of Loan If a loan is already taken from a Govt. body or a Co-operative Society for purchase of a dwelling house/flat or for the construction of a dwelling house or including acquisition of a site, and 10 years of membership of the fund. Withdrawal from PF for repayment of such loan shall be the least of the following amounts: (a) Outstanding loan (b) PF balance including the member’s and employer’s contributions with interest (c) 36 months’ salary (Basic + D.A.) CFP Level 2 - Module 1 - Retirement Planning - India Page 44

Advance for Illness Eligibility >Non refundable advance from his account in the fund for any of the three circumstances of illness: 1. Hospitalization lasting for one month or more or; 2. Major surgical operation in a hospital or; 3. Suffering from TB, leprosy, paralysis, cancer, mental derangement or heart ailmet Such an advance even for the treatment of a member of his family. The amount of such an advance not to exceed the member’s own contribution with interest in the fund or the member’s salary for 6 months. Advance for Marriage/Education Non Refundable’ advance from the PF for (i) The member’s own marriage, (ii) The marriage of his or her daughter, son, sister or brother or (iii) for the post matriculation education of his or her son or daughter - Conditions: (1) The member should have completed 7 years’ of membership of the fund, and (2) The amount of his own share of contributions with interest should be Rs. 1,000 or more. (3) This advance shall not exceed 50% of the member’s own share with interest. (4) Maximum 3 advances shall be admissible to a member in his lifetime. Tax Benefit: This provident scheme is EEE ( exempt , exempt , exempt ) First Exempt means contribution made by employee subject to maximum Rs.1.5 lacs quality U/S 80 C. Second Exempt means interest accrued on the amount accumulated is tax free. CFP Level 2 - Module 1 - Retirement Planning - India Page 45

Third Exempt means the withdrawals done during the tenure of the fund for an emergency or marriage or education or the withdrawals at the end of the tenure on retirement or death are also completely tax free. Amount withdrawal before 5 years of service is taxable. But, it is not taxable if his services are terminated by reasons of: a. His illness b. For a cause beyond the control of the employer. c. Discontinuation of the employer’s business. Note: If an employee gets the provident fund and transfer to another recognized provident fund trust on joining new service, total service with all the employers as provident fund member has to be counted for tax benefit. Universal Account Number (UAN) and Employer Portability The UAN (the Universal Account number) is a 12 digit code allotted to every member of the EPFO - using which he can manage his Provident fund account. This number is issued by the Ministry of Employment and Labour under the Government of India. The UAN is used to identify the employee’s account with the EPFO – and is used as a reference number for all contributions and service related issues. The UAN number of the employee remains the same throughout his lifetime. It is portable and can be moved around with him to another employer when he moves between jobs. Public Provident Fund (PPF) under the Public Provident Fund Act, 1968 The Public Provident fund or PPF is a long term savings and tax planning option backed by the government of India available to Indian resident citizens. The Public Provident fund was set up under the Public Provident fund act 1968. This act was repealed in 2020 along with the Government Savings certificate Act and was merged into the Government Savings Promotion Act. The PPF Act itself was also changed into the Public Provident fund Act 2019 with some minor changes. CFP Level 2 - Module 1 - Retirement Planning - India Page 46

Viability of PPF Scheme – A Credible Aggregator of Retirement Corpus  The PPF is a relatively secure investment as compared to other tax saving instruments such as ELSS (Equity Linked Savings schemes).  It is a debt oriented fund offering a fixed interest rate as determined by the government based on the government yields.  PPF calculates interest on the outstanding investments on a compounded basis which helps the corpus to multiply at a steady inflation-adjusted pace.  One of the major benefits of the PPF account is that it cannot be attached by the courts if a litigation goes against the subscriber. He cannot be asked to use his PPF account proceeds to pay off his debts. However, this does not apply to the Income Tax authorities. Salient Features: Item Description Eligibility Any adult in his / her name or in minor's name in the capacity of guardian of the minor. Minimum Rs. 500/- per annum is required to be deposited. amount The accounts in which deposits are not made for any reason are treated as discontinued accounts and such accounts cannot be closed before maturity. The discontinued account can be activated by payment of the minimum deposit of Rs.500/- with default fee of Rs.50/- for each defaulted year. Maximum Rs. 1.5 lac per annum amount The depositor has flexibility and freedom for depositing any amount and n number of times. Maturity period 15 years excluding the year in which account opened. Year means financial year. An Account, on the expiry of fifteen years, can be extended for a further period of five years at a time. Interest Rate The interest is paid as per the rates declared by the Government from time to time. CFP Level 2 - Module 1 - Retirement Planning - India Page 47

Nomination The rate of interest was 8% per annum up to 30.11.2011. facility Transferability The interest rate increased to 8.6% per annum w.e.f. 01.12.2011. Loan facility The interest has been increased to 8.80% w.e.f. 01.04.2012. The interest has been revised to 8.70% w.e.f. 01.04.2013. Interest rates keep on changing as per market interest rates. Interest rate is 7.7% p.a. as on 01-04-2020. The interest is compounded annually. The interest for the month is calculated on the minimum balance available in the account from 5th of a month to the last date of the month. Available A PPF account can be transferred from a branch of State Bank of India or a nationalized bank to Post Office and vice versa and also from a branch of State Bank of India to a designated branch of Nationalized Bank. A PPF account cannot be transferred from one person to another. Even in the case of death of a depositor, the nominee cannot continue the account. A depositor can avail of loan facility in the third financial year from the financial year in which the account was opened. Application in prescribed form is to be made for loan along with the pass book of the account. In case, the loan is sought from minor's Account, the guardian has to make a declaration that the money is required for the use/benefit of the minor. The loan can be taken up to 25% of the amount in the account at the end of the second year immediately preceding the year in which the loan is applied for. The loan is repayable in lump sum or convenient installments. Where loan is repaid within 36 months, interest is charged at 1% (w.e.f. 2019) and if it is not repaid within 36 months, the interest at the rate of 6% is charged on the outstanding balance. The interest is to be paid in not more than two installments after the loan amount is fully repaid. Once the first loan is repaid, second loan can be obtained on same terms. This facility is available till the end of 5th financial year from the end of the financial CFP Level 2 - Module 1 - Retirement Planning - India Page 48

Withdrawal year in which initial subscription was made. facility A depositor can make partial withdrawals, once every year from his PPF account Premature after expiry of five years, from the end of Financial Year, in which the initial Encashment deposit was made. Application in prescribed form is to be made for withdrawal along with the pass book of the account. In case, the withdrawal is sought from minor's Account, the guardian has to make a declaration that the money is required for the use/benefit of the minor. The amount of withdrawal is restricted to 50% of the credit balance at the end of the fourth year immediately preceding the year of withdrawal or the year immediately preceding the year of withdrawal, whichever is lower. In case of accounts extended beyond Maturity period partial withdrawals are allowed once in a year with the condition that the amount of withdrawal during a five year block period should not exceed 60% of the balance in the account at the commencement of the block period. 1. change in residential status of the account holder 2. to finance higher education of the dependent children of the account holder 3. to finance treatment of serious ailments or life threatening diseases of account holder, spouse, dependent children or parents, or higher education of the account holder. Tax benefits NOTE> the premature closure is at a cost of a one percent reduction in the rate at which interest is credited to the account.\" Interest Available under Section 80C Taxability Interest income is totally tax free. Other features The benefits of exemption of interest from Income Tax is not available on deposits made in a PPF account after expiry of fifteen years without exercising option in writing for continuance of the account within one year. PPF accounts can be opened and operated through an authorized agent appointed by the National Savings Organization. CFP Level 2 - Module 1 - Retirement Planning - India Page 49

Only local cheques are accepted for deposit and the date of presentation of local cheque and demand draft is treated as date of deposit in the Account. Balance in PPF account cannot be attached under court decree. Entire deposit in a PPF account is exempt from the Wealth Tax. The deposit in a minor account is clubbed with the deposit of the account of the guardian for the limit of Rs.1,50,000 On death of the account holder his nominee(s)/legal heir(s) cannot continue the account. The account has to be closed in such case. Deposits in excess of Rs.1,50,000 in a financial year in a PPF account are refunded without interest and the excess amount is not considered for income tax rebate. Pension plans from Mutual Funds A pension plan is an annuity which is bought to generate income during retirement. Functional similarity of these annuities to pensions is the reason why they are also called pension plans. Pension plans are preferred by investors who receive a large sum as superannuation benefit post retirement. Investor chooses to invest the proceeds in a pension plan so as to generate safe and regular income for the rest of his life. Various agencies provide pension plans but pension plans offered by Mutual Funds are good. Mutual funds offering pension plans which are hybrid in nature having investment in both debt and equity component. Mutual Fund pension plans collect money from several investors and invest the pooled money in equity and debt markets. Equity exposure is in the range of 40% which is lower as compared to balanced funds (65% to 70%). Investors can either invest lump sum amounts or can choose the route of systematic investment plan (SIP). The SEBI re-categorisation of mutual funds in 2018 resulted in the opening up of a new category called solution oriented scheme schemes – this included schemes for goals such as retirement and children’s education. Tax Benefit and Lock-in Period, Systematic Monthly/Annual Investments in Units Investments in the scheme are eligible for tax exemption under section 80C of the Income Tax Act 1961. Most of the funds have a lock- in period of 5 years or until retirement whichever is earlier. CFP Level 2 - Module 1 - Retirement Planning - India Page 50