Not a Government Employee? You Can Still Get Pension

The craze for government jobs have always been high. This is not only because it provides job security but another important reason is that employees get pension after retirement. However, what about someone who is not a government employee? Can you still get pension? Lets see.

As per the latest update, anyone who bags a government job after 2004 is not eligible for pension. So both private and government employees are in for the role. However, employees who joined government services after 2004 come under contributory pension scheme. Under this scheme 10% of the basic salary will be deducted and contributed throughout their service. Once the employee retires, 70% of the pension would be given to them in lumpsum.

This pension scheme is called NPS. NPS is market linked like the Mutual Funds. Hence there is no fixed interest rate promised. It is also a new concept hence its less famous but its gaining popularity at its own pace because of its benefits. It offers tax benefit while investing and also while withdrawal at retirement. Once you sign up for a NPS scheme, you have to select one Fund manager out of these:

  • SBI Pension Funds
  • LIC Pension Fund
  • UTI Retirement Solutions
  • HDFC Pension Fund
  • ICICI Prudential Pension Fund
  • Kotak Pension Fund
  • Reliance capital Pension Fund
  • Birla Sun Life Pension Management Ltd

(Not Applicable for government employee as government decides fund manager for them)

Once you’ve selected one Fund manager, you have to select the scheme out of these:

  • Scheme E (equity): Which allows up to 75% equity participation, that is stocks.
  • Scheme C (corporate debt): Which invests only in high-quality corporate bonds up to 100%.
  • Scheme G (government/Gilt bonds): Which invests only in government bonds up to 100%.
  • Scheme A (Alternative Investment): Which allows up to 5% to other investment option such as Gold, etc. and newly added asset class for private sector subscriber. In this scheme, the investor has to specify how much percent to be allocated for each class.

The NPS account matures at the age of 60 and you can withdraw up to 60% of the accumulated corpus tax free. This corpus includes both your contributions and returns. You can also make a premature exit after completing 3 years in the NPS even before the age of 60. In such case, you can withdraw up to 20% of your corpus which will be taxed at slab rate. The balance 80% has to be used to buy an annuity (regular pension). The annuity will be taxable at your slab rate.

This option was designed only for government employee back in 1999 when government thought of stopping pension for their employee. Hence as I mentioned earlier, all the new government employees joining after 2004 stopped receiving pension and this NPS came into existence.

Then later in 2009, this scheme was made open to all the citizen of India and is highly regulated by Pension Fund Regulatory and Development Authority (PFRDA). Hence this is one of the safest investment option for retirement.

It is similar to the 401(k) account in USA which is widely appraised and recommended by all the finance experts. NPS is considered one of the best tax saving instruments as its tax-free at the time of maturity and it is ranked just below Equity-linked savings scheme (ELSS).

This is simply because government and top officers in Indian Revenue System (IRS) have understood the importance of savings and investing and more importantly the benefit of compounding in long term. When someone invests even a smallest amount of Rs.1000 per month can give you crores in return at the time of retirement. For example: Rs.1000 invested in any mutual fund, index fund or NPS that gives 15% annualized return (which is an average return of any decent fund) for 40 years, (let’s assume you started working at the age of 20 and retired at 60) then you get a total amount of Rs.3,14,03,755 (that’s more than 3 crore rupees).

The earlier you start, higher your benefit will be. The more you delay, bigger the consequences would be.