What is the Retirement Age in the Private Sector in India?

World Bank data for 177 countries reveals that about half of the retirement age is 60 or older. In contrast, India’s retirement age is relatively low, with private sector workers retiring at 58 and government employees at 60.

Planning for retirement should begin with your very first salary. Early financial preparation allows you to save effectively for a comfortable and worry-free retirement. It's never too late to begin if you haven't started yet. The sooner you start, the more time you'll have to build a substantial retirement fund.

Understanding the retirement age in the private sector can guide your investment strategy and help ensure you are well-prepared for the future.

Will the Retirement Age be Increased to 62?

According to its 22nd report on pension reforms, the Parliamentary Standing Committee on Finance has proposed raising the retirement age for central government employees from 60 to 62, with a potential future increase to 65 in phases.

However, the central government has yet to indicate that it will increase the retirement age to 62 in India. This might be a necessary step based on the current facts and figures. 

Globally, India currently has the lowest retirement age. Between 1998 and 2020, the average life expectancy increased from 61.7 to 70.1. Thus, individuals retiring at 60 have not had a stable income source other than their retirement benefits for almost a decade.

Thus, increasing the retirement age will provide individuals with a stable source of income in their later years and enable them to accumulate a heftier EPF corpus.

Pension

A pension provides you with regular income after retirement. As per rules, Central Government employees are liable to receive a pension after completing at least 10 years of qualifying service.

The pension amount is calculated based on the payments (latest basic pay) or average emoluments (average basic pay in the last 10 months of service), whichever is higher.

The final pension amount equals 50% of the average or total emoluments, whichever is higher.

Retirement Gratuity

This is a definite amount that every company provides you during your retirement. It serves as an appreciation for your contribution to the company. However, to be eligible for a gratuity from the organisation, you must have provided continuous service for 5 years.

You can easily calculate the gratuity amount before retirement using the following formula:

Gratuity = Basic + D.A. of last drawn salary x (15/26) x Number of years of service

Death Gratuity

Service Gratuity

If a retiring Government servant has less than 10 years of qualifying service, the person is liable to receive service gratuity. It is equal to the employee’s last drawn half month’s basic pay, added with the Dearness Allowance (DA) for each completed 6-month period of qualifying service.

Moreover, employees can receive this one-time payment over and above their retirement gratuity.

Employees' Leave Encashment

You can encash your remaining leave balance and earned leaves to earn substantial money. You can use this amount to contribute towards various investment schemes and receive interest from them.

However, you should note that the maximum amount for this happens to be ₹25 Lakhs. Will you have to pay an additional tax on this amount? Well, for private sector employees, this amount is partly taxable and partly exempt as per Section 10(10AA)(ii).

Provident Fund Advantages After Retirement

Periodic contributions to the EPF scheme when receiving your monthly salary ensure you are left with sumptuous money when you retire. Some benefits include a loan against PF, a home loan, free insurance, a partial withdrawal facility, etc.

There are two main divisions in the EPF contributions: the employee and the employer. Females must contribute 10% to 12% of their salary, whereas males need to contribute up to 8%. Employers must deposit up to 12% of the employee's salary to the EPF account.

A clear idea about these benefits is essential before you reach retirement age in the private sector. Knowing them can help you in making the most out of these benefits. For example, you will be able to know how many leaves to save to get a tax-exempt leave encashment and so on.

Deposit Linked Insurance Scheme

As per the General Provident Fund (GPF) rules, upon the death of the subscriber, the individual entitled to receive the amount will receive an additional sum equal to the account’s average balance 3 years immediately before the subscriber’s death.

Now, this amount cannot exceed ₹60,000, and the subscriber must have been in service for at least 5 years before his/her death.

Contributory Provident Fund

The Contributory Provident Fund Rules are applicable for non-pensionable Government employees working in any services under the President’s control.

At the time of duty or foreign service, the subscriber needs to allocate not less than 10% and not more than his/her total emoluments to the fund on a monthly basis. Additionally, the employer will deposit an additional 10% to the fund.

Private sector employees usually calculate their retirement date using a Retirement Date Calculator. You can use Digit’s retirement planning calculator, where individuals just need to enter their date of birth and choose their retirement age.  The system will then automatically generate the retirement date. 

Here are the steps to use the Digit Retirement Planning Calculator:

• Step 1: Use the sliders to set your age, retirement age, annual income, income growth rate, current investment, pension expected, and inflation assumed.
• Step 2: Based on these details, the ‘Total Funds Needed’ tab will show you the total amount of money you will need by the time you retire to maintain your desired lifestyle throughout retirement.

Now that you know the retirement age for private sector employees in India, you can plan accordingly to ensure a regular income stream in your later years. Moreover, you should consider investing in different schemes to maximise your returns and reduce risk.