Provident Fund Vs Pension Fund

Smart is the person who starts planning for retirement from the early stage of his/her career. Since there are two major types of retirement funds available in the Indian investment market, Provident Fund and Pension Fund, so selecting the most suitable one can be a little challenging for most of the people. Many may face problems in selecting the most suitable scheme, therefore in order to make this decision easier, we are here discussing some basic differences between Provident Fund and Pension Fund.

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Let us take a closer look towards the generic definitions of these two:

  1. Provident Fund

    Retirement plans in India run by the government are known as the provident fund. Most of the provident funds are eligible for tax exemption and are funded by the contribution of both employee and employer. The Indian government sets the rules for the withdrawals in a provident fund such as the withdrawal amount, minimum age, and maximum lock-in period. In case of the death of the participant, his/her surviving dependents such as the spouse, children, etc. can withdraw this money. Apart from the provident fund, the Indian government also provides another small saving scheme as Public Provident Fund or PPF. The Public Provident Fund gives investment security with a high rate of interest. One can invest from Rs.500 to Rs.1 Lakh yearly in his/her PPF account for a minimum term of 15 years. The interest rate provided in this account is 8.70% and is compounded every year. Some of the benefits of having a PPF account are:

    • One can invest a small amount for a long period.

    • The complete amount in the PPF account inclusive of the earned interest is free of tax and the tax on wealth is also not being charged on it.

    • Apart from these two benefits, one also gets a tax rebate under Section 80C of the Income Tax Act, 1961.

  2. Pension Fund

    In general, a pension fund is a retirement planning scheme wherein both employer and employee make a contribution in a fund pool that is kept aside for the benefits of the employees. Most of the times, it is the responsibility of the employer to manage the pension funds for its employees. However, there are some pension funds in India that may enable the participants to select the contribution amount and investments. The pension fund offered by the Indian government is the National Pension Scheme (NPS). This scheme was initiated by the Indian government in the year 2004 and is available for all the Indian citizens who need savings for their retirement. The NPS is launched in two sections – Tier 1 and Tier 2. Tier 1 scheme is for all the government employees, wherein 10% of the basic pay of an employee, dearness allowance, and dearness pay earned by an employee is added in the NPS account of an employee every month. The government also contributes to the same amount in the NPS account of an employee. However, for the Tier 2 plan, one can open a pension account and can make contributions in it. However, there will not be any additional contribution from the government.

  • Inclusions in Tier 1 Accounts:

    • The minim contribution at the time of opening this account should be Rs.500 and its multiples thereof.

    • The minimum balance that one should have in this account at the end of every financial year is Rs.6000.

    • In every fiscal year, at least one contribution should be made in this account.

  • Inclusions in Tier 2 Accounts:

    • The minimum contribution that one should make at the time of opening this account is Rs.1000. However, the smallest contribution can be Rs.250.

    • The minimum balance that one should have in this account at the end of a fiscal year is Rs.2000.

    • In one fiscal year, at least one contribution should be made in this account.

Difference between Pension Fund and Provident Fund

Let us take the example of the Government Pension Scheme and Public Provident Fund to understand the difference between the pension fund and Provident fund:

Parameter National Pension Scheme Public Provident Fund
Eligibility NRIs and Indian citizens both are eligible to open an NPS account. PPF is allowed to Indian citizens only.
Interest Rate 10% to 12% depending upon the situation of the market. 8.60% fixed interest.
Minimum Age 18 years to 60 years Even a minor can open a PPF account with a parent as a custodian.
Yearly Contribution Minimum – Rs.6000Maximum – No Limit Minimum – Rs.500Maximum – Rs.1 Lakh
Tax The contributions that one makes towards NPS are deducted from total income. Tax-Free

These are the basic differences between these two schemes and depending upon the eligibility and requirement one can make the most suitable selection. However, before starting to invest in any plan or policy, it is suggested to review it completely. Apart from this, being an investor it is always recommended to check the savings and future requirements before jumping into any new investment fund.

Since both pension fund and provident fund have their own set of advantages and disadvantages, thus it is up to an investor to review a plan before investing his/her hard earned money.

There are many monthly pension plans as well are provided by various insurance providers, so if one wants he/she can opt for the same as well. Most of these plans are available at really affordable rates and can be purchased online from their portal. So, it entirely depends upon an investor where he/she wants to invest his/her money.

However, the main point to note here is that one should be prepared for his/her retirement full well as it is the time where money plays a major role in every aspect. Whether one wants to go for medical treatment or hire a maid everything is chargeable and to afford that when one is retired becomes easy with a good retirement planning.

These both schemes are good for retired people and most of the times are available with very less minimum contribution rate. So, plan well and be ready for the golden period of life with financial stability.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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