Difference Between Pension Plans, National Pension Scheme And Provident Fund

It is very important for everyone to start planning for their retirement. No one would wish to be a burden on anybody in their old age and pension plans, pension schemes or provident funds can help you achieve financial security and financial independence post your retirement. Financial planning for a financially independent life post your retirement is essential that one must take into consideration. Before investing your money in anything, you must understand the difference between pension plans, national pension schemes and provident funds.

What are Pension Plans?

A pension plan is also known as a retirement plan which requires an employer to make contributions to funds set aside for an employee’s future benefit. Under pension plans an employer commits to make regular contributions to a pool of funds that shall be provided to the employee for his/her at the time they decide to retire, for their future benefit.

What is the National Pension Scheme?

National Pension Scheme (NPS) is a government run pension scheme. It was initially launched in 2004 for government employees but later in 2009 it was opened for all sections of the public. Under this scheme must contribute regularly in a pension account during his/her working life. The subscriber can withdraw a part of the investments in lump sum and invest part of their investment in annuity to ensure a regular income after retirement. 

What are Provident Funds?

Provident funds are retirement schemes for employees which are governed by the government. Under a provident fund the employee regularly contributes towards the provident fund every month. The monthly savings get accumulated every month and can be withdrawn as a lump sum amount at the time of retirement or at the end of employment. 

Tax Exemptions Under Pension Plans, National Pension Scheme and Provident Fund

• Pension Plan - Under a regular pension plan one can avail tax exemptions under Section 80C under the Income Tax Act, 1961. When one chooses to invest in a pension plan he/she can avail tax exemption for up to Rs 1.5 Lakh.

• National Pension Scheme (NPS) - Under National Pension Scheme one can avail of tax exemptions under Section 80 CCD (1B) according to the Income Tax Act, 1961. One can avail of tax exemptions for up to Rs. 50,000 by investing in National Pension Scheme.

• Provident Fund - Under provident funds one can avail tax exemptions under Section 80C according to the Income Tax Act, 1961. You can avail of tax exemptions for up to Rs. 1.5 Lakh.

Also Read: 

What Is The Importance Of Retirement Planning?

Understanding The Different Types Of Annuities Under A Retirement Plan

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.