pension plan

Good deal: Why the National Pension Scheme is an excellent option to save for your retirement

But is the scheme too confusingly presented and mistrusted by salaried Indians?

The basic concept of a pension is simple: an individual stashes away savings in small instalments during their working life and lives off the returns accrued on the investment after retirement.

Taxation systems offer breaks for savings towards a pension fund. In fact, many, if not most, nations demand some level of enforced savings for creating a pension corpus for salaried employees. In theory, this is win-win: the savings can be invested to create new businesses while senior citizens who would otherwise be a burden on their families or the state can take care of themselves.

The devil, as always, lies in the details. In this specific case, also in the demographics. What kind of returns do such pension schemes hope to yield? Will the returns be good enough to beat inflation? Who invests the money and how much risk does it entail? What sort of safety guarantees exist?

The demographic issues are coming to light across the European Union, not least because most West European nations now have ageing populations and low birth rates. In Italy, for example, the number of pensioners exceeds the working population. As populations age, there are progressively fewer workers funding the pension scheme and more pension payouts. India need not worry about this yet since half its population is under 25 and over 70% under 35.

In practice, designing pension schemes can be contentious. Witness the One Rank One Pension struggle that the Indian defence forces have been fighting for a while. Taxation has to make sense. Inflation indexing is also necessary and how this is done can create high levels of resentment.

Assume a person joins the formal workforce at age 25 and works till age 65 – that’s a 40 year time-span. India does not have decent inflation indices over such long periods. In fact, it did not have a single Consumer Price Index until well into the 21st century. Inflation was calculated using the Wholesale Price Index, which gives a misleading impression of retail inflation.

So let us take a few random examples to get a sense of historic inflation. A packet of ITC Gold Flake cigarettes that cost Rs 4 in 1977 now costs Rs 150. That works out to about 9.9% inflation per annum.

Yes, I am taking a deliberately facetious example of a popular FMCG brand that has been around 40 years. You will get similar numbers if you look at soaps, cars, or salaries. I am also old enough to remember petrol selling at Rs 1.65 per litre in December 1973 when the Organisation of Petroleum Exporting Countries started its arm-twisting after the Yom Kippur War. Given that petrol is Rs 69-Rs 70 now, that is about 8.8% inflation per year. Mutton used to cost Rs 10 per kg back in 1977, it is around Rs 350-Rs 400 a kg now.

Looking at the food, cigarette and fuel numbers above, let us assume that an Indian pension scheme would need to generate returns of over 10% compounded to be adequately inflation-proof. It would also have to meet its own running expenses and ideally, make surpluses. Many Indian mutual funds have expense ratios of over 2%.

So, an Indian pension fund should be targeting 13% per annum to be sustainable. A pension scheme can invest in many things but it has to avoid taking big speculative risks. Debt is safe but it does not offer this sort of long-term return. Fixed deposit rates over the years seem to have undershot inflation.

Nor, sadly for traditionalists, does gold or real estate offer returns consistently above 10%. Returns from gold have just about kept pace with inflation – the compounded return is about 10.7% over the past 40 years.

Best option?

Only one asset class consistently provides such returns over the long-term – equity. We do not have stock market indices going as far back as 40 years. The popular Sensex of the Bombay Stock Exchange has a base of 100 points on April 1, 1979. It traded at 33,700 last week. That is over 16% compounded return per year from capital appreciation alone and dividends would have added another 1.25% per year on average to the total return.

Another important factor for a pension scheme is that it should offer a choice to pensioners. If the pensioner is willing to take greater risks, they must be allowed the chance to get higher returns. The National Pension Scheme seems to check some of these boxes.

It offers a choice in terms of “Tier 1” and “Tier 2” accounts. The Tier 1 account is locked in for long periods, either until the subscriber is 60, or 70 if the account was started after the subscriber had turned 60. Partial withdrawals are allowed under certain circumstances. Tier 2 is like a bank savings account or a mutual fund investment in that money can be withdrawn at will. This is subject to normal income and capital gains taxation norms.

Any Indian can join the Nation Pension Scheme and stay with it until age 70. Enrolment fees are low as are annual maintenance and transaction charges. There is a tax break for contributions of up to Rs 2 lakh per annum (split under two sections of the IT Act); the minimum contribution is Rs 1,000 per year.

Importantly, the pensioner has a choice of assets. They can choose from a mixture of five different types of funds – equity funds, government securities fund, fixed income instruments other than government securities, Alternative Investment Funds, Real Estate Investment Trusts.

A subscriber is allowed to invest up to 75% in equity funds and up to 5% each in commercial mortgage-based securities or residential mortgage-based securities and units issued by Real Estate Investment Trusts. They can also invest in units issued by mandated Infrastructure Investment Trusts and Alternative Investment Funds.

Unlike the Public Provident Fund, whose interest rate is fixed for every quarter, the National Pension Scheme does not offer fixed returns. Also unlike the Provident Fund, which is tax-free, the National Pension Scheme does have tax incidence although it is likely quite low. However, the Provident Fund offers a fixed return, which is generally well below the historic inflation rate. The National Pension Scheme could offer significantly better returns, even post-tax.

At maturity, the pensioner can withdraw 40% of the amount in a lump sum, tax-free. Of the rest, they must mandatorily convert 40% into an annuity. There is no tax on this amount at the time of conversion but the income from the annuity is subject to tax. This annuity is inheritable. The remaining 20% is subject to tax at maturity.

New choices

The options of Real Estate Investment Trusts and Alternative Investment Funds are hard to assess since these instruments are new to India. They could be high-return options. They could also be disastrous given the number of stalled infrastructure projects and real estate deals. These funds could also yield steady income; for example, Real Estate Investment Trusts, which focus on commercial rentals seem to yield stable returns without much risk.

Ideally, the National Pension Scheme should be managed on passive lines where it buys mandated instruments without exercising much discretion. That is similar to an index fund. This would ensure a decent return over decades; it would be low expense; it would also prevent the sort of scandals and scams that vitiated the Unit Trust of India and led to the dissolution of US-64. Decently managed, this could be a great instrument for the common man.

In November 2017, the National Pension Scheme had over 11 million subscribers and it was managing Rs 2.1 trillion. Roughly half of the subscribers were government employees, contributing over Rs 1.84 trillion.

This is a drop in the ocean when you consider that there is a 400 million workforce that the National Pension Scheme should cover and that it is open to all. This is a massive behavioural quirk that bears investigation: are people reluctant to sign up because of the long lock-in periods? Do they mistrust government fund managers? Is the scheme too confusingly presented? All questions that could do with answers since this scheme deserves to be more popular.

We welcome your comments at
Sponsored Content BY 

The ordeal of choosing the right data pack for your connectivity needs

"Your data has been activated." <10 seconds later> "You have crossed your data limit."

The internet is an amazing space where you can watch a donkey playing football while simultaneously looking up whether the mole on your elbow is a symptom of a terminal diseases. It’s as busy as it’s big with at least 2.96 billion pages in the indexed web and over 40,000 Google search queries processed every second. If you have access to this vast expanse of information through your mobile, then you’re probably on something known as a data plan.

However, data plans or data packs are a lot like prescription pills. You need to go through a barrage of perplexing words to understand what they really do. Not to mention the call from the telecom company rattling on at 400 words per minute about a life-changing data pack which is as undecipherable as reading a doctor’s handwriting on the prescription. On top of it all, most data packs expect you to solve complex algorithms on permutations to figure out which one is the right one.


Even the most sophisticated and evolved beings of the digital era would agree that choosing a data pack is a lot like getting stuck on a seesaw, struggling to find the right balance between getting the most out of your data and not paying for more than you need. Running out of data is frustrating, but losing the data that you paid for but couldn’t use during a busy month is outright infuriating. Shouldn’t your unused data be rolled over to the next month?

You peruse the advice available online on how to go about choosing the right data pack, most of which talks about understanding your own data usage. Armed with wisdom, you escape to your mind palace, Sherlock style, and review your access to Wifi zones, the size of the websites you regularly visit, the number of emails you send and receive, even the number of cat videos you watch. You somehow manage to figure out your daily usage which you multiply by 30 and there it is. All you need to do now is find the appropriate data pack.

Promptly ignoring the above calculations, you fall for unlimited data plans with an “all you can eat” buffet style data offering. You immediately text a code to the telecom company to activate this portal to unlimited video calls, selfies, instastories, snapchats – sky is the limit. You tell all your friends and colleagues about the genius new plan you have and how you’ve been watching funny sloth videos on YouTube all day, well, because you CAN!


Alas, after a day of reign, you realise that your phone has run out of data. Anyone who has suffered the terms and conditions of unlimited data packs knows the importance of reading the fine print before committing yourself to one. Some plans place limits on video quality to 480p on mobile phones, some limit the speed after reaching a mark mentioned in the fine print. Is it too much to ask for a plan that lets us binge on our favourite shows on Amazon Prime, unconditionally?

You find yourself stuck in an endless loop of estimating your data usage, figuring out how you crossed your data limit and arguing with customer care about your sky-high phone bill. Exasperated, you somehow muster up the strength to do it all over again and decide to browse for more data packs. Regrettably, the website wont load on your mobile because of expired data.


Getting the right data plan shouldn’t be this complicated a decision. Instead of getting confused by the numerous offers, focus on your usage and guide yourself out of the maze by having a clear idea of what you want. And if all you want is to enjoy unlimited calls with friends and uninterrupted Snapchat, then you know exactly what to look for in a plan.


The Airtel Postpaid at Rs. 499 comes closest to a plan that is up front with its offerings, making it easy to choose exactly what you need. One of the best-selling Airtel Postpaid plans, the Rs. 499 pack offers 40 GB 3G/4G data that you can carry forward to the next bill cycle if unused. The pack also offers a one year subscription to Amazon Prime on the Airtel TV app.

So, next time, don’t let your frustration get the better of you. Click here to find a plan that’s right for you.


This article was produced by the Scroll marketing team on behalf of Airtel and not by the Scroll editorial team.