MODULE NO.

4 RETIREMENT PLANNING

Note:-
What is a 401(k) plan?
A 401(k) plan is an employer-sponsored retirement plan which allows eligible employees to make
contributions. The contributions are deducted from the salary or the wage of the employee.

MEANING OF RETIREMENT PLANNING.

Retirement planning refers to the process of setting financial goals and creating a strategy to ensure
a secure and comfortable retirement. It involves assessing your current financial situation, estimating
your future financial needs during retirement, and implementing a plan to achieve those needs.
Retirement planning encompasses various aspects such as saving, investing, managing debt, and
optimizing sources of retirement income.

The primary objective of retirement planning is to ensure that individuals can maintain their desired
standard of living and meet their financial obligations during their retirement years when they are
no longer earning a regular income from employment. Effective retirement planning takes into
account factors such as inflation, life expectancy, healthcare costs, lifestyle preferences, and any other
specific goals or obligations individuals may have during retirement.

RETIREMENT PLANNING PROCESS.

Retirement planning is the process of determining your financial goals for retirement and creating a
strategy to achieve those goals. It involves assessing your current financial situation, estimating your
future financial needs, and then implementing a plan to save and invest in order to meet those needs
during retirement. Let's break down the components of retirement planning and provide an example
to illustrate the process.

1. Assess Current Financial Situation:

The first step in retirement planning is to assess your current financial situation. This includes
determining your current income, expenses, assets, and debts. Understanding where you stand
financially will help you set realistic retirement goals.

2. Define Retirement Goals:

Next, you need to define your retirement goals. This involves estimating how much money you will
need during retirement to maintain your desired lifestyle. Consider factors such as living expenses,
healthcare costs, travel plans, and any other expenses you anticipate having during retirement.

3. Calculate Retirement Needs:

Once you've defined your retirement goals, you'll need to calculate how much money you'll need to
save to achieve those goals. This involves estimating your retirement expenses and then determining
how much you need to save to generate that income during retirement. Factors such as inflation, life
expectancy, and investment returns will influence these calculations.

4. Create a Retirement Savings Plan:

With your retirement goals and needs in mind, you can create a retirement savings plan. This plan
will outline how much you need to save each month or year to reach your retirement goals. Consider
using tax-advantaged retirement accounts such as 401(k)s, Individual Retirement Accounts (IRA), or
both to maximize your savings potential.

5. Invest Wisely:
Once you're saving for retirement, it's important to invest your savings wisely to help them grow over
time. This may involve diversifying your investments across different asset classes such as stocks,
bonds, and real estate. Your investment strategy should align with your risk tolerance, time horizon,
and retirement goals.

6. Monitor and Adjust:

Retirement planning is an ongoing process. It's essential to regularly monitor your progress towards
your retirement goals and make adjustments as needed. This may involve increasing your savings
rate, adjusting your investment strategy, or reevaluating your retirement goals based on changes in
your life circumstances.

Example:

Let's consider an example to illustrate the retirement planning process.

John is 40 years old and wants to retire at age 65 with a comfortable lifestyle. He currently earns
$80,000 per year and estimates that he will need $60,000 per year in retirement to cover his living
expenses and travel plans. John expects to live until age 90.

Based on his current expenses and anticipated retirement lifestyle, John calculates that he will need
$1.5 million in retirement savings to generate $60,000 per year in income during retirement.

Given his current savings and retirement accounts, John determines that he needs to save $800 per
month to reach his retirement savings goal of $1.5 million by age 65. He plans to invest his retirement
savings in a diversified portfolio of stocks and bonds to achieve a balance of growth and stability.

John regularly monitors his retirement savings and adjusts his savings rate and investment strategy
as needed. As he gets closer to retirement age, he may reassess his goals and make any necessary
changes to ensure a financially secure retirement.

PENSION PLANS AVAILABLE IN INDIA

In India, there are several types of pensions plans available to help individuals save for retirement.
These plans are offered by both government entities and private financial institutions. Here are some
of the common pension plans available in India:

1. National Pension System (NPS):

The National Pension System is a government-sponsored pension scheme launched by the Pension
Fund Regulatory and Development Authority (PFRDA) in 2004.
It is open to all Indian citizens between the ages of 18 and 65. Under NPS, individuals can contribute
towards their pension account during their working years and receive regular pension income after
retirement.
Contributions to NPS are invested in various asset classes such as equities, government bonds, and
corporate bonds, providing the potential for higher returns.

Example: Raj, a 30-year-old working professional, enrols in the NPS and contributes a portion of his
salary towards his pension account. He chooses an investment option based on his risk tolerance and
retirement goals. After retiring at age 60, Raj receives regular pension payments from his NPS
account.

2. Employee Provident Fund (EPF):

The Employee Provident Fund is a retirement benefit scheme established under the Employees'
Provident Funds and Miscellaneous Provisions Act, 1952. It is mandatory for most salaried
employees in India.
Both the employer and the employee make contributions to the EPF account, with a portion of the
employee's salary deducted each month.
The EPF corpus accumulates over time and provides a lump sum withdrawal option upon retirement,
as well as a monthly pension option through the Employees' Pension Scheme (EPS).

Example: Maya, a government employee, contributes a portion of her salary to her EPF account
throughout her career. Upon retiring at age 58, Maya opts for a monthly pension under the EPS, which
provides her with a regular income during retirement.

3. Atal Pension Yojana (APY):

Atal Pension Yojana is a social security scheme launched by the Government of India aimed at
providing a pension to workers in the unorganized sector.
Individuals between the ages of 18 and 40 can enrols in APY and make contributions towards their
pension account.
The pension amount depends on the contributions made and the age at which the individual joins
the scheme.

Example: Ram, a 35-year-old self-employed individual, enrols in APY and contributes regularly
towards his pension account. Upon reaching the age of 60, Ram receives a monthly pension based on
his contributions and the pension plan chosen.

4. Company Pension Plans:

Some employers offer company-sponsored pension plans or retirement benefit schemes to their
employees as part of their employee benefits package.
These plans may include options such as gratuity, superannuation, or annuity schemes to provide
retirement benefits to employees.

Example: Priya works for a multinational corporation that offers a superannuation scheme to its
employees. The company contributes a portion of Priya's salary to her superannuation account,
which accumulates over time and provides her with a pension income after retirement.
These are some of the pension plans available in India, offering individuals various options to save
for retirement and ensure financial security during their later years. It's essential to understand the
features, benefits, and eligibility criteria of each plan before choosing the most suitable one based on
individual needs and preferences.

PUBLIC PROVIDENT FUND (PPF)

The Public Provident Fund (PPF) is a popular long-term savings scheme backed by the Government
of India. It was introduced in 1968 to encourage savings among individuals and provide them with a
secure investment avenue for retirement planning. Here's an explanation of the Public Provident
Fund along with an example:

Features of Public Provident Fund (PPF):

1. Tenure:
The PPF has a maturity period of 15 years, which can be extended indefinitely in blocks of 5 years
after maturity.

2. Interest Rate:
The interest rate on PPF is set by the government and is subject to periodic revisions. As of 2022, the
interest rate is compounded annually and is tax-free. The interest rate is typically higher than that
offered by savings accounts and fixed deposits.

3. Investment Limit:
Individuals can invest a minimum of Rs. 500 and a maximum of Rs. 1.5 lakh in a financial year in their
PPF account. The investment can be made in lump-sum or in a maximum of 12 installments per year.

4. Tax Benefits:
Contributions made to PPF are eligible for tax deductions under Section 80C of the Income Tax Act,
up to a maximum limit of Rs. 1.5 lakh per annum. Additionally, the interest earned and the maturity
amount are exempt from tax.

5. Withdrawal and Loan Facility:

Partial withdrawals are permitted from the 7th year onwards, subject to certain conditions.
Additionally, individuals can avail of loans against the balance in their PPF account from the 3rd to
6th year of account opening.

6. Account Extension:
After the initial 15-year tenure, individuals can extend their PPF account for a block of 5 years
indefinitely.

Example of Public Provident Fund (PPF):

Let's consider an example to illustrate how PPF works:

Riya, a 30-year-old working professional, decides to open a PPF account to save for her retirement.
She plans to invest Rs. 1.5 lakh annually in her PPF account. Here's how her PPF account may progress
 over time:

Year 1: Riya opens a PPF account and makes an initial deposit of Rs. 1.5 lakh. Assuming an interest
rate of 7.1% per annum (as of 2022), her PPF account balance at the end of the year would be Rs.
1,60,650 (including interest).

Year 2: Riya makes another contribution of Rs. 1.5 lakh to her PPF account. The interest earned on
the previous year's balance is added to her account. Assuming the same interest rate, her PPF account
balance at the end of the year would be higher than the previous year's balance.

Year 15: After completing 15 years, Riya's PPF account matures. She has the option to withdraw the
entire maturity amount or extend her account for another 5-year block.

After Year 15: Riya decides to extend her PPF account for another 5 years. She continues to make
contributions and earn tax-free interest on her balance. She can make partial withdrawals or take a
loan against her PPF balance if needed.

Retirement: By the time Riya retires at age 60, her PPF account has grown significantly due to regular
contributions and compounding interest. She can now withdraw the entire maturity amount tax-free
or choose to extend her account further if she wishes to continue saving.

In this example, Riya's PPF account serves as a reliable long-term savings instrument, helping her
accumulate a substantial corpus for her retirement while enjoying tax benefits and guaranteed
returns.

Employee Provident Fund

In India, the Employee Provident Fund (EPF) is a compulsory savings scheme managed by the
Employees' Provident Fund Organization (EPFO), a statutory body under the Ministry of Labour and
Employment, Government of India. It is designed to provide financial security and stability to
employees during their retirement years. Both employees and employers contribute a certain
percentage of the employee's salary to the EPF account every month.

Here are the key elements of the Employee Provident Fund along with examples:

1. Employee Contribution:
Every month, a portion of an employee's salary (usually 12% of basic salary plus dearness allowance)
is deducted and contributed towards the EPF. For example, if an employee's basic salary is Rs. 20,000
per month, the EPF contribution would be Rs. 2,400 (12% of Rs. 20,000).

2. Employer Contribution:
Employers are also required to contribute the same percentage (12% of basic salary plus dearness
allowance) towards the EPF on behalf of their employees. Using the same example, the employer's
contribution would also be Rs. 2,400.
3. Interest:
The EPF balance earns interest, which is compounded annually. The current interest rate is declared
by the EPFO every year. For instance, if the interest rate is 8% per annum, the EPF balance will grow
accordingly.

4. Withdrawal:
EPF allows partial or complete withdrawal under certain circumstances such as retirement,
resignation, marriage, education, medical treatment, etc. However, complete withdrawal is generally
allowed only after retirement.

5. Tax Benefits:
Both employee and employer contributions to EPF are eligible for tax deductions under Section 80C of
the Income Tax Act, subject to certain conditions.

6. UAN (Universal Account Number):

Each EPF member is assigned a unique UAN which helps in tracking multiple EPF accounts,
transferring funds, and accessing services online.

7. EPF Passbook:
Employees can access their EPF account statement, known as the EPF passbook, online. It shows
details of contributions, interest earned, withdrawals, and balance.

8.Nomination:
EPF members are required to nominate a beneficiary who will receive the accumulated funds in case
of the member's death.

Example:
Let's consider an employee named Rahul whose basic salary is Rs. 30,000 per month. His employer
also provides a dearness allowance of Rs. 5,000. Therefore, Rahul's EPF contribution would be 12% of
(Rs. 30,000 + Rs. 5,000) = Rs. 4,200 per month. His employer would also contribute Rs. 4,200 towards
his EPF account. If the interest rate for that year is 8%, his EPF balance at the end of the year would
grow accordingly. If Rahul needs to withdraw funds for his child's education, he can apply for a partial
withdrawal following EPF withdrawal rules and regulations.

Deduction available under the income tax 1961 for retirement

plan
Under the Income Tax Act of 1961 in India, there are several provisions that allow for deductions
related to retirement planning. These deductions encourage individuals to save for their post-
retirement years by offering tax benefits on contributions made towards retirement plans. Here's a
detailed explanation of the deductions available under the Income Tax Act for retirement planning:
1. Section 80C:
Under Section 80C of the Income Tax Act, individuals can claim deductions for contributions made
towards various investment instruments, including retirement plans.
The maximum deduction allowed under Section 80C is Rs. 1.5 lakh per financial year (FY).
Retirement plans eligible for deduction under Section 80C include:
Employee Provident Fund (EPF)
Public Provident Fund (PPF)
Voluntary Provident Fund (VPF)
Equity Linked Savings Schemes (ELSS)
National Savings Certificate (NSC)
Sukanya Samriddhi Account Scheme
Tax-saving fixed deposits with banks
Pension Plans offered by insurance companies
2. Section 80CCC:
Section 80CCC allows for deductions on contributions made towards certain pension plans offered by
insurance companies.
The combined deduction limit under Sections 80C, 80CCC, and 80CCD(1) cannot exceed Rs. 1.5 lakh
per FY.
However, contributions to pension plans under Section 80CCC are subject to an additional limit of Rs.
1.5 lakh beyond the overall limit of Section 80C.
3. Section 80CCD(1):
This section provides deductions for contributions made by individuals towards notified pension
schemes, including the Atal Pension Yojana (APY) and the National Pension System (NPS).
The maximum deduction allowed under this section is 10% of the individual's gross total income (GTI),
including salary, self-employment income, etc., for the FY.
The limit of 10% of GTI is within the overall limit of Rs. 1.5 lakh under Section 80CCE.
For self-employed individuals, the contribution is considered as 20% of their gross total income.
4. Section 80CCD(1B):
An additional deduction of up to Rs. 50,000 is available under Section 80CCD(1B) for contributions
made towards the NPS Tier I account.
This deduction is over and above the limits prescribed under Sections 80C, 80CCC, and 80CCD(1).
5. Section 10(12A):
This section provides for exemption of commuted pension received by an employee under certain
conditions.
6. Gratuity:
Gratuity received by an employee on retirement or termination of service is exempt from tax up to a
certain limit, as per the provisions of Section 10(10).
The maximum exemption limit for gratuity is Rs. 20 lakhs, as per the latest amendment.

It's important to note that the actual tax benefits and deductions may vary based on individual
circumstances, income levels, and the specific retirement plans opted for by the taxpayer. Therefore,
individuals should consult with a tax advisor or financial planner to understand the most suitable
retirement planning options and their tax implications.
1. What is a 401(k) plan?
A) A government-sponsored retirement scheme
B) An employer-sponsored retirement plan
C) A personal savings account
D) A type of insurance planCorrect Answer: B) An employer-sponsored retirement plan

2. What is the primary objective of retirement planning?

A) Maximizing current income
B) Ensuring financial security during retirement
C) Investing in high-risk assets
D) Paying off debts
Correct Answer: B) Ensuring financial security during retirement

3. Which factor is NOT typically considered in retirement planning?

A) Inflation
B) Life expectancy
C) Entertainment expenses
D) Healthcare costs
Correct Answer: C) Entertainment expenses

4. Which retirement planning step involves assessing your current income, expenses, assets, and
debts?
A) Define Retirement Goals
B) Assess Current Financial Situation
C) Calculate Retirement Needs
D) Invest Wisely
Correct Answer: B) Assess Current Financial Situation

5. Which retirement plan is mandatory for most salaried employees in India?

A) National Pension System (NPS)
B) Employee Provident Fund (EPF)
C) Atal Pension Yojana (APY)
D) Public Provident Fund (PPF)
Correct Answer: B) Employee Provident Fund (EPF)

6. Under which section of the Income Tax Act can individuals claim deductions for contributions
to retirement plans such as EPF and PPF?
A) Section 80C
B) Section 80CCC
C) Section 80CCD(1)
D) Section 80CCD(1B)
Correct Answer: A) Section 80C

7. Which retirement plan allows individuals to make contributions and receive regular pension
income after retirement, with investments in various asset classes?
A) National Pension System (NPS)
 B) Employee Provident Fund (EPF)
C) Atal Pension Yojana (APY)
D) Public Provident Fund (PPF)
Correct Answer: A) National Pension System (NPS)

8. What is the tenure of the Public Provident Fund (PPF)?

A) 5 years
B) 10 years
C) 15 years
D) 20 years
Correct Answer: C) 15 years

9. Which section of the Income Tax Act provides for an additional deduction of up to Rs. 50,000
for contributions to the NPS Tier I account?
A) Section 80CCC
B) Section 80CCD(1)
C) Section 80CCD(1B)
D) Section 80C
Correct Answer: C) Section 80CCD(1B)

10. What is the interest rate on the Public Provident Fund (PPF) as of 2022?
A) 6%
B) 7%
C) 8%
D) 9%
Correct Answer: B) 7%

11. How often is the interest compounded on the Public Provident Fund (PPF)?
A) Quarterly
B) Semi-annually
C) Annually
D) Monthly
Correct Answer: C) Annually

12. Which pension scheme is aimed at providing a pension to workers in the unorganized sector in
India?
A) National Pension System (NPS)
B) Employee Provident Fund (EPF)
C) Atal Pension Yojana (APY)
D) Public Provident Fund (PPF)
Correct Answer: C) Atal Pension Yojana (APY)

13. What is the maximum deduction allowed under Section 80C of the Income Tax Act per financial
year?
 A) Rs. 50,000
B) Rs. 1 lakh
C) Rs. 1.5 lakh
D) Rs. 2 lakh
Correct Answer: C) Rs. 1.5 lakh

14. Which section provides for deductions on contributions made towards certain pension plans
offered by insurance companies?
A) Section 80CCC
B) Section 80CCD(1)
C) Section 80CCD(1B)
D) Section 80C
Correct Answer: A) Section 80CCC

15. What is the maximum exemption limit for gratuity as per the provisions of Section 10(10) of
the Income Tax Act?
A) Rs. 10 lakhs
B) Rs. 15 lakhs
C) Rs. 20 lakhs
D) Rs. 25 lakhs
Correct Answer: C) Rs. 20 lakhs

16. Which section of the Income Tax Act allows for deductions on contributions made towards
notified pension schemes like the Atal Pension Yojana (APY) and the National Pension System
(NPS)?
A) Section 80CCC
B) Section 80CCD(1)
C) Section 80CCD(1B)
D) Section 80C
Correct Answer: B) Section 80CCD(1)

17. How often can individuals extend their Public Provident Fund (PPF) account indefinitely after
the initial maturity period of 15 years?
A) Every 5 years
B) Every 10 years
C) Every 15 years
D) Every 20 years
Correct Answer: A) Every 5 years

18. What does EPF stand for?

A) Employee Pension Fund
B) Employer Provident Fund
C) Employees' Provident Fund
D) Equitable Provident Fund
 Correct Answer: C) Employees' Provident Fund

19. What does NPS stand for?

A) National Pension System
B) New Provident Scheme
C) National Provident Service
D) Nominal Pension Security
Correct Answer: A) National Pension System

20. Which retirement planning step involves creating a plan outlining how much to save each
month or year to reach retirement goals?
A) Define Retirement Goals
B) Assess Current Financial Situation
C) Create a Retirement Savings Plan
D) Invest Wisely
Correct Answer: C) Create a Retirement Savings Plan