Personal Finance

Atal Pension Yojana: Guaranteed returns in the silver years

Dhuraivel Gunasekaran | Updated on May 12, 2019 Published on May 12, 2019

Subscribers will get a pension of up to ₹5,000, based on their monthly contributions

Given the general lack of steady income options post-retirement, the Atal Pension Yojana (APY) is a good bet especially for the lower-middle class and the unorganised segment.

The APY scheme guarantees a monthly pension of up to ₹5,000 for those who make monthly contributions during their working life.

APY was launched by the Centre in 2015, and is aimed at providing financial security to people in the unorganised sector during their post-retirement life. Any citizen of India with a savings or a post office account can invest in APY. The age of the subscriber should be 18-40 years.

The government‘co-contributed’ up to 50 per cent of the contribution for five years for those who joined the scheme between June 1, 2015, and March 31, 2016, and were not beneficiaries of any social security schemes, besides not being income-tax payers.

According to the pension fund regulator, the total number of subscribers has crossed 1.5 crore.

Defined pension

The APY gives a pension that is guaranteed by the government. The subscribers will get a pension of ₹1,000, ₹2,000, ₹3,000, ₹4,000 or ₹5,000 per month on attaining the age of 60, depending on the contributions made by them.

Most banks and post offices allow you to open an account online or offline. An app is also available to track your balance and transactions. The monthly contribution to APY is modest — from a low of ₹42 a month for an 18-year-old desiring a pension of ₹1,000, to a maximum of ₹1,454 a month for a 40-year-old seeking ₹5,000 as monthly payouts.

On the death of a subscriber (after the age of 60), the pension will go to his/her spouse. In case of death of both the subscriber and spouse, the pension corpus will be given to a nominee.

On death of the subscriber before attaining 60, the spouse will be given the option to either withdraw fully or continue paying the premium for the balance period (original subscriber’s 60th birthday) and then avail themselves of the pension benefit.

For instance, if an individual joins APY at the age of 18 and makes a contribution of ₹210 a month for 42 years, it will give her a monthly pension of ₹5,000 after the age of 60. On the subscriber’s death, her spouse will also get the pension. Later, the nominee of the subscriber will be returned a corpus of ₹8.5 lakh (indicative).

Contributions to APY are eligible for the same tax benefits that the National Pension System (NPS) enjoys. Apart from the ₹1.5-lakh deduction under Section 80CCD(1), the premium paid in APY can get an additional deduction of up to ₹50,000 under Section 80CCD(1B) of the Income Tax Act. However, the pension receivable is taxed as per the income tax slab of the subscriber.

It is to be noted that a similar scheme — the ‘Pradhan Mantri Shram Yogi Maan-dhan’ (PMSYM) — was announced in Budget 2019 to provide an assured monthly pension of ₹3,000 only to workers in the unorganised sector who earn up to ₹15,000 per month. The premium under PMSYM is relatively lower than the APY’s.

Inflation-beating returns

The government guarantees returns under APY at 8 per cent, which is higher than the prevailing CPI (consumer price index) inflation in recent years. Assuming that the annual inflation stays at around 5 per cent, the returns are relatively attractive.

The ₹5,000 pension after 20 years would be worth ₹1,884 in present value. If inflation is higher, it will reduce the real effective return.

UTI, SBI and LIC manage the APY corpus of around ₹6,860 crore (as of March 2019). In the four years since their launch, these APY funds, managed by UTI, SBI and LIC, have generated compounded annualised returns (CAGR) of 9.1, 8.4 and 8.8 per cent, respectively. Such excess returns will be passed on to the subscriber.

These funds invest the APY corpus in equity, government securities and corporate debt instruments. The exposure to equity for these funds is in the 11-15 per cent range.

Costs involved in maintaining the APY account are similar to that of the NPS and include registration, record-keeping, account opening and maintaining charges, and investment management fee.

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Published on May 12, 2019
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