Retirement planning is one of the most important financial aspects of an individual's life. It is essential to have a steady source of income to maintain a decent standard of living after retirement. Pension schemes have been an integral part of retirement planning for many decades. In India, two significant pension schemes have been prevalent: the old pension scheme and the national pension scheme. In this blog post, we will discuss the differences between these two schemes and why the national pension scheme is better.
Old Pension Scheme: The old pension scheme was the traditional pension scheme that was prevalent in India before the introduction of the new pension scheme in 2004. It was primarily available to government employees, and the scheme was funded entirely by the government. Under this scheme, employees were entitled to a guaranteed monthly pension after retirement. The pension amount was calculated based on the employee's length of service and the salary drawn during their service period.
National Pension Scheme: The National Pension Scheme (NPS) was introduced in 2004 and is open to all Indian citizens. This scheme is a voluntary, defined contribution retirement savings plan. The scheme is managed by the Pension Fund Regulatory and Development Authority (PFRDA) and is regulated by the Government of India. Under this scheme, individuals contribute a part of their income into a pension account, which is invested in various financial instruments such as stocks, bonds, and government securities. The accumulated amount, along with the interest earned, is paid out as a pension after retirement.
Benefits of National Pension Scheme:
Flexibility: The national pension scheme provides a lot of flexibility to the individual. The scheme allows the individual to choose the investment mix, the pension fund manager, and the annuity service provider.
Portability: The national pension scheme is portable across jobs, and an individual can contribute to the scheme even if they change their job. The scheme is not limited to government employees, and any individual can join the scheme.
Tax Benefits: The national pension scheme offers tax benefits under Section 80C of the Income Tax Act, which allows the individual to claim a deduction of up to Rs. 1.5 lakhs from their taxable income.
Higher Returns: The national pension scheme has the potential to generate higher returns as the funds are invested in a diversified portfolio of financial instruments.
Transparency: The national pension scheme is highly transparent, and the individual can monitor their contributions and the investment performance through an online portal.
In conclusion, while the old pension scheme was a guaranteed source of income after retirement, the national pension scheme offers a lot more flexibility, portability, tax benefits, and higher returns. With the national pension scheme, individuals have greater control over their retirement savings and can build a retirement corpus that suits their needs. Therefore, it is advisable to invest in the national pension scheme to secure a financially independent retirement.