When we talk about social security the attention primarily shifts to the country of stars and stripes. It is wrongly presumed that India does not care for its human capital and the largest contributor to its booming GDP. The truth is that India too has social security measures in place for its currently working and future aged workforce.
Though hard to believe now, but not so after the explanation that follows.
In India there are mainly two types of retirement plans which has several measures to ensure that the employees are eligible to getting several benefits after retirement or superannuating from a company.
1) Defined Benefit Plans
2) Defined Contribution Plans
1) Defined Benefit Plans
in Defined Benefit plans employee's post retirement benefits are ascertained and fixed based upon a formula, irrespective of their contributions. They are linked to the employee's age, service tenure and amount of salary. The benefits that are based on these variables which in turn are directly based on certain predefined formulae.
The employees prefers this type of benefit plan as they don't have to face any investment risk and neither do they have to make any specific contributions towards these future benefits.
Employers consider this deplorable as these benefits lead to the addition of a liability on their balance sheets, as and when these benefits get accrued. The contributions towards these benefits are solely made by the employer. The employer is not only left at that, even after the contributions that are made the investment risk is also Bourne by them.
The types of benefit schemes in the defined benefit plans are:-
Gratuity
It's the benefit paid to the employee for long term continuous service with the employer. It has a vesting period of 5 years and based upon the type of service rendered it normally pays 15 days salary for every completed year of service.
Retrenchment Compensation
A company cannot just fire its employees as and when it feels like. To protect the interests of the employees the employer has to pay a specified compensation to it's employees in times of a closure of a unit or downsizing. It also has tax benefits so that the maximum benefits are availed by the employee
Voluntary Retirement Scheme
To achieve optimum utilization of human capital certain companies offer a VRS option to it's employees to retire early and in return they are offered a range of benefits, they can be cash or shares or even an annuity amount for life. this ensures that even as the employee retires early his post retirement expenses can be taken care of.
Leave Encashment
When a person does not avail of the statutory leaves allocated to him over the year then they get accumulated over the working years. At retirement he can claim the salary for all the unavailed leaves over the years at the daily wage rate payable at retirement. Hence increasing the value of the leaves many folds over his working life.
2) Defined Contribution Plans
In these plans the employee's contributions are defined but his benefits are not certain. They are based on the investments made and the returns obtained on the same over the investment tenure. The employers responsibility ends after making the initial statutory contributions. Because of these reasons Defined Contribution Plan is preferred by the employers and not by the employees. But it also holds a very important benefit for the employees Portability of benefits. Unlike the defined benefit plans, the defined contribution plans being portable can be carried along with the employee if he changes his employer. So his benefits remain unchanged even when he changes his job. In Defined Benefit plans if the employee changes the job then his benefits are either completely diminished or substantially reduced..
Employee Provident Fund
This compulsory investment option offered by all employers can be a great retirement asset, It deducts 12% of an employee's basic salary and the same is matched by the employer. This entire investment is invested at a fixed rate of return of 8.5% p.a. Though Loans and Withdrawal options are available its not advisable to use this fund for anything else but retirement. To force employees not to foreclose this account before retirement there is a penalty for complete withdrawal of money from this account before retirement.
Public Provident Fund
Another long term investment option given to everyone is PPF. it is an investment for a period of 15 years which grows at a rate of 8% p.a. There is a minimum investment amount every year of Rs. 500 and a cap on the maximum amount of Rs. 70,000/-
New Pension Scheme
It's a pension system recently launched by Govt of India from 1st April, 2009.. You can regularly invest your money in this and get a lump sum at your retirement and a fixed monthly income for the lifetime. It will work almost the same way as Private Pension Schemes. The investment choice can is completely at the discretion at of the investor. the investment is not only by the investor but a part is also contributed by the employer and the Government.
Employee Deposit Linked Insurance Scheme
This scheme also provides individuals with a term life insurance at a miniscule cost. This helps protect the interests of the investor incase of an unfortuanate even which might cost his life.
Employee Stock Options
For companies with Shares issue attractive Esops to employees which enable them to buy a stake in the company at a discounted price. This increases their loyalty towards the company and motivates them to work towards the progress of the company
Though it is clear that the availability of retirement beneits and social security measures are in plenty in India but the the actual ability to avail this benefit is very tedious and cumbersome due to the highly bureaucratic nature of executing agencies involved in providing these services. If one finds a way too surpass and circumvent these processes and policies in place then the Indian social security measures can be of great vaue for everyone in the post retirement phase.
Happy Planning
Think before you act as
'It's all in the Mind'
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