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Francis Rodrigues
Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.
Written By:
Vishal Subharwal
Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.
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What is Retirement Planning?
Retirement planning is a financial strategy that involves saving and investing for your future needs once you stop working. Retirement planning is not a pressing issue when you first start earning money. Postponing it till a later period of life might be a manageable solution. But you have to keep in mind that being organised is always a good idea.
In India, retirement planning typically involves contributions to pension schemes like the Employee Provident Fund (EPF) or the National Pension System (NPS), along with personal savings and investments. Real estate, fixed deposits, and mutual funds are a few examples of these investments.
When putting together a retirement plan, it's critical to take your lifestyle, anticipated retirement age, and medical expenses into account. Overall, retirement planning is creating financial plans that will enable you to save, invest, and spend in later life following your long-term objectives.
Types of Retirement Plans
Immediate annuity plans
Annuity plans help a retired individual with regular monthly payments. How does this retirement plan work? After one has made a single lump sum investment, the annuity payout begins within a year. This option is particularly helpful for those who are nearing their retirement and require a feasible option.
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Deferred annuity plans
As the name suggests, this kind of annuity plan works differently than the one mentioned above. Here, the investor decides the time period over which they want to receive the annuity payouts. In this case, an individual makes small payments over a period of time to create a large corpus for retirement.
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Senior citizen savings scheme
This government-backed scheme offers regular income to individuals post-retirement. This type of plan can be availed by retired persons who are over 60 years or above, or even by those who fall between the range of 55 and 60 years.
The investment can be as low as Rs 1,000 in a year while the maximum investment goes up to Rs 15 lakh. The initial time period for investment is five years that can go up to an additional three years after maturity. The current interest rate for such plans is 8.2% per annum for 2023-24.
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National Pension System
NPS can be extended to individuals who fall between the range of 18 and 70 years. The tax benefits under this plan can go up to Rs 2 lakhs in a financial year and works best for those who have a moderate to high risk appetite. This is because investments are largely in market-linked instruments including equities and debt funds. Investors can also opt for corporate, government bonds and alternative investment funds. The National Pension Scheme account matures after the investor turns 60 years old.
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How Much Do You Need to Retire?
The amount of money required for retirement in India is a complicated calculation that is dependent on several variables. A popular rule of thumb is the "30x rule," which states that you should have 30 times your yearly income in retirement savings. But this can change depending on your way of life, how long you plan to live, and how much inflation is.
Your retirement needs are influenced by several things. Think about the lifestyle you want to lead after retirement first. Will you cut costs or keep your existing level of living? Second, consider how long you anticipate to live and any future medical costs. Third, consider inflation, as it gradually reduces the buying power of your money.
Determine your current yearly spending first to determine your retirement corpus. Then, account for inflation and specific situations using online retirement calculators or the advice of a financial advisor. Note that retirement planning is a continuous effort. To guarantee a pleasant retirement, regularly assess your funds and make any necessary adjustments to your plan.
Why Plan for Retirement?
Let’s better understand why you need to plan for retirement.
Preparing for a Longer Life
Advancements in healthcare and awareness about healthy lifestyle choices have increased India’s life expectancy from 68 years in 2015 to 69.7 years in 2020. With India’s growing life expectancy, people today have to plan their finances expecting to live longer than earlier generations. Retirement planning is not just about saving money. It is also about ensuring that the retirement savings will last throughout the retirement years. To achieve this, one needs to plan for retirement with a long-term view, considering inflation, increasing healthcare costs, and other expenses. Individuals must select retirement plans that enable them to enjoy a stress-free retirement and focus on the things that matter the most to them.
Fight Inflation
Inflation refers to the rate at which the prices of goods and services increase over time, decreasing the purchasing power of money. You must consider the impact of inflation on the cost of living while planning for retirement. If you assume an inflation rate of 5%, the cost of living will double in 14 years. So, if you’re hoping to retire in 20 years, you’d need more than double what you require now to maintain your standard of living. Retirement plans find safe avenues to invest your money and build a corpus that can help you battle the impact of inflation.
Leave a Legacy
Retirement planning enables you to leave a legacy for your loved ones. Planning your retirement helps you accumulate wealth that you can use once you retire and pass on to your loved ones. By starting to save early for retirement and investing in retirement plans that offer guaranteed returns, you can build a significant corpus over time. You can also use the accumulated funds to support a charitable cause and help make a difference, leaving a legacy that goes beyond financial wealth.
Maintain Your Standard of Living
Crucially, retirement planning enables you to maintain your standard of living once you hang up your work boots. Retirement planning involves identifying your retirement goals, estimating the expenses, and creating a plan to accumulate sufficient savings to meet them. You can use retirement plans to create a retirement corpus that provides monthly payments to help replace your regular income and maintain your standard of living. Since these plans invest your funds, they can help battle the impact of inflation on your finances.
Fulfil Retirement Goals
Retirement planning empowers you to translate your vision for retirement into reality. By setting clear financial goals, like travelling the world or supporting loved ones, and building a roadmap to achieve them, you gain control over your future financial security.
Such meticulous planning ensures your retirement savings effectively meet your desired lifestyle. This will allow you to embrace your golden years with peace of mind and financial independence.
Be Emergency-Ready
Retirement is not all sunshine and leisure. Unexpected events like medical emergencies or home repairs can disrupt your financial security. Building an emergency fund specifically for retirement can provide a buffer during these challenging times.
By having a substantial emergency fund, you can weather unforeseen circumstances without derailing your long-term financial goals. Make sure to take into account the effects of inflation when deciding how much to save.
Advantages of Retirement Planning
Life expectancy
The average life expectancy today is 70-75 years, so if you retire at 60 years, you will still have many years of retirement where you need regular income. That’s where a comprehensive retirement plan helps. You can start your retirement planning as early as 20 years or 30 years or 40 years of age.
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Medical costs
As costs of medical treatments rise, it is important to have a corpus for emergencies. While a sound health insurance plan can help you tide over such emergencies during your work life, it’s better to factor in medical expenses that arise in old age as well. That’s because spending from your own pocket is not practical particularly during old age, when an individual is more susceptible to illnesses.
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Tax benefits
Investing in a retirement plan can help reduce tax liability and maximise savings. You can claim a deduction of up to Rs 1.5 lakh for the premiums paid towards the plan under Section 80C of the Income Tax Act, 1961.
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Peace of mind
It may sometimes get very challenging to manage money, both for short-term and long-term needs. Sometimes, health issues may crop up without notice and it’s bound to hurt your pocket, especially if you are old and do not have a regular income. With retirement planning, you can stay happy and healthy without being stressed.
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Importance of a Retirement Plan
Retirement planning helps you prepare for the future. Let’s better understand why you need a retirement plan.
Prepare for Medical Emergencies
Retirement plans provide you with regular income to help take care of your financial obligations once you retire. As you grow older, you may face certain health concerns or medical emergencies that require urgent care. The payouts can help you take care of hospital and medical bills, leaving you free to focus on your health instead of worrying about your finances.
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Remain Financially Independent
Nobody wishes to be dependent on others, especially not people who have worked hard for several years. Your retirement plan helps you maintain your financial independence once you retire. The payouts help you look after your bills and other financial obligations without relying on loved ones.
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Help Your Family
Your retirement plan enables you to support your family financially. The payouts allow you to maintain your independence and look after your finances. Depending on the corpus you grow, you can also help your loved ones with their various goals and dreams. Retirement plans also have a life insurance component and provide a payout to your beneficiary if something happens to you. The life cover ensures your loved ones do not have to struggle financially.
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Meet Your Financial Goals
Retirement plans provide you with the regular payments you need to fulfil your financial goals. The amount helps you maintain your standard of living and protect your finances from inflation. Additionally, the amount helps you build an emergency fund and repay any pending debt.
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A Step-by-Step Guide to Retirement Planning Process
Planning for retirement involves the following steps:
Determine Your Retirement Date
Crafting a successful retirement plan hinges on knowing your target. This initial step involves pinpointing your ideal retirement age. Consider factors like desired lifestyle, financial security needs, and health expectations. While traditional retirement falls around age 60, you may envision retiring earlier or later. This crucial decision will set the timeline for your saving and investment strategies.
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Define Your Post-Retirement Goals
After you have determined your expected retirement age, envision your ideal lifestyle for retirement planning. Consider your desired living situation, travel aspirations, and hobbies you wish to pursue. Do you dream of volunteering or starting a passion project? Outlining these goals will help determine the financial resources needed to bring your vision to life.
Be as specific as possible to create a roadmap for a fulfilling and financially secure retirement. Note that the more expensive lifestyle you wish to live, the higher will be the sum you need to accumulate.
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Assess Post-Retirement Expenses
Understanding your anticipated expenses in retirement is crucial for setting realistic financial goals. Meticulously track your current spending across various categories like housing, utilities, groceries, and healthcare. Factor in potential changes like reduced commuting costs, increased medical needs, etc.
Also, don't forget to account for inflation's impact on your future purchasing power. This comprehensive assessment will form the foundation for determining the retirement nest egg you will need to maintain your desired lifestyle.
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Estimate Costs of Your Retirement Goals
Now that you have envisioned your ideal retirement lifestyle, it's crucial to translate those dreams into a concrete financial plan. In this step of retirement planning, meticulously estimate the expenses associated with your desired retirement. This includes regular living costs, healthcare needs, and any special aspirations like travel or hobbies.
By understanding the total sum you'll require, you can establish a realistic savings target and investment strategy for a secure and fulfilling retirement.
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Plan for an Emergency Fund
Life can be unpredictable, even in retirement. An emergency fund acts as a financial safety net to cover unexpected expenses like medical bills, appliance repairs, or home emergencies. This step encourages the creation of a separate savings account specifically for these unforeseen circumstances, ensuring peace of mind and continued financial security throughout your golden years.
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Calculate the Amount and Add Inflation
Account for inflation's impact on your retirement savings. Use a long-term inflation estimate (typically 6-8%) and adjust your desired retirement corpus to ensure its purchasing power maintains pace with rising prices. This step safeguards your financial security throughout your golden years.
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Evaluate Your Current Savings
Gather your financial statements and assess your current savings and investments. Consider factors like employer-sponsored retirement plans, personal retirement accounts, and any emergency funds. This crucial step provides a baseline for calculating the gap between your desired retirement lifestyle and your current financial track. By understanding this gap, you can make informed decisions about future contributions and investment strategies.
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Determine Your Monthly Investment Contribution
This step of retirement planning involves calculating a monthly investment amount that fits comfortably within your budget while ensuring you reach your retirement goals. Factors to consider include your desired retirement lifestyle, remaining years until retirement, and existing retirement savings. Utilise online retirement calculators or consult a financial advisor to determine the optimal monthly contribution that balances affordability with long-term financial security.
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Choose Your Investment Option
Once you have established your retirement goals and timeline, it is crucial to select suitable investment vehicles. This step involves understanding your risk tolerance and time horizon. A variety of options can be considered, such as stocks, bonds, mutual funds, and employer-sponsored plans.
Each of these options has varying risk-reward profiles. Carefully evaluate these options to build a well-diversified portfolio that aligns with your long-term retirement objectives.
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Decide on Regular Income or Lump Sum Payouts
Now that your retirement savings are in place, it is time to consider your preferred income stream. Choose between receiving regular payments, similar to a paycheck, or a one-time lump sum distribution. This decision will significantly impact your financial security and flexibility in retirement. Carefully evaluate your future expenses and risk tolerance to determine the approach that best suits your needs.
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Stages of Retirement Planning
Retirement planning in India is a crucial aspect of financial security. It involves saving and investing for a comfortable post-retirement life. The journey can be divided into three primary stages as discussed below:
Young Adult (Ages 21–35)
This is the perfect time to begin saving for retirement. Make a thorough budget at first to comprehend your income and spending. Set aside some, even if it is a small percentage of your income for retirement savings. Think about making long-term investments in equities, mutual funds, or employer-sponsored retirement plans.
Examine retirement plans supported by the government, such as the National Pension System (NPS). Moreover, it is important to understand that compounding gives your investments more time to grow if you start them early.
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Early Midlife (Ages 36–50)
Your career should be well-established by this point, and your salary could have gone up. Analyse your retirement plan and make any required modifications. Boost the amount you contribute to your retirement funds. Start making contributions to the NPS (National Pension Scheme) if you have not already.
Understand that re-evaluating your investing plan and risk tolerance is also a smart idea at this point. To safeguard your funds as you get closer to retirement, you might wish to switch your investments to more conservative ones.
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Later Midlife (Ages 50–65)
Make sure to maintain and increase your retirement funds as you get closer to retirement. Regularly review your portfolio and make the necessary modifications to keep it in line with your time horizon and risk tolerance. To reduce risk, think about diversifying your investments. Look at possibilities to augment your retirement income, such as reverse mortgages or annuities.
It is crucial to budget for anticipated medical costs at this point. Take into account acquiring sufficient coverage for your health insurance. Examine long-term care choices as well to handle any future needs.
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Where should you invest for retirement?
Retirement planning in India can be done by investing in a range of retirement plans that can help ensure a steady stream of income to maintain a certain lifestyle post-retirement. Currently, the retirement plans in India include annuity plans, retirement funds, Unit-Linked Investment Plans and the National Pension System.
Tips for Retirement Planning
Start Saving Now
When it comes to planning for retirement, the earlier you start, the better. Starting early gives you more time to save a corpus that will grow steadily each year. The power of compounding works better the longer you stay invested, so purchasing one of the various types of pension plans in your 20s and 30s will help you enjoy a financially secure retired life.
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Prepare for Future Financial Emergencies
While planning your retirement, you must consider future financial emergencies. For example, purchasing a health insurance plan and setting up a contingency fund to help with medical costs or other emergencies helps you maintain your financial independence once you retire.
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Explore Life Insurance Options
Every good financial plan includes a life insurance policy. You can consider getting a term plan to secure your family’s financial future and help your spouse prepare for retired life. Ensure you evaluate your options and find a policy that provides enough support for your loved ones.
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Diversify Your Investments
When it comes to planning your finances for the future, never put all your eggs in one basket. You should find ways to diversify your investments to ensure good returns over the years. Ideally, look for investment options that allow you to lower your risk by investing in different types of funds. Evaluate the various investment and retirement plans available and pick one that suits your financial goals and risk appetite.
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Think About Your Retirement Goals
Finally, before you purchase a retirement plan, understand how much you would need to achieve your post-retirement goals. Consider the cost of travelling in the future or the cost of learning how to play an instrument or set up a consultancy. List your goals and carefully consider how much they would cost. Once you understand how much you need, you can work on a plan to help you achieve your target.
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How do retirement plans work?
Ideally, you should start investing in a retirement plan as early as possible. This will give you enough time to create a retirement corpus for a financially secure future in the long run. Once accumulation is done, the corpus can be used to purchase annuities for monthly income post-retirement. Furthermore, even after being converted to annuities, the retirement corpus can continue to grow. The annuity payouts can either be lifelong or for a certain period of time post-retirement.
Factors to Consider While Planning for Retirement
Estimate Retirement Age and Investment Horizon
It is important to evaluate your expected retirement age and accordingly plan your future. One must consider their current age, expected retirement age as well as the investment horizon to build a strategy for retirement.
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Risk appetite
If one starts retirement planning early on, their risk appetite is likely to be higher than someone who begins late. In that case, they can invest in assets like equities that may be risky but offer higher returns.
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Current financial situation
Another aspect that must be considered in retirement planning is an individual’s current financial situation–their expenses, lifestyle and any debts they have. This will help understand how much needs to be saved for retirement.
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Spending on retirement needs
This may sound like a far-fetched plan but it is imperative to account for several expenses including housing, healthcare and other expenses that may arise during old age. Determining these expenses may be a good idea to help build a comprehensive retirement strategy for the future.
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Asset allocation plan
Also, the returns earned from an investment may be lower, particularly in case of higher inflation. Once an individual has evaluated their investment goals, investment horizon, risk appetite and similar needs, they can consult an asset allocator for guidance.
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Eligibility Criteria for Retirement Plans in India
The eligibility criteria for retirement plans in India are discussed below:
- Entry Age: The minimum age to enroll for most retirement plans in India is 18 years old. This allows individuals to take charge of their financial future early and benefit from the power of compounding. There may be variations depending on the specific plan, with some having a higher entry age limit. Be sure to check the eligibility details of the plan you are considering.
- Premiums: The amount you contribute regularly towards your retirement plan is known as the premium. These contributions can typically be chosen based on your affordability and desired retirement income. Some plans offer flexible premium options, allowing you to adjust your contributions as your financial situation evolves.
- Vesting Age: Vesting age refers to the age at which you can begin receiving the retirement benefits accumulated in your plan. This age can vary depending on the specific plan you choose, but it typically falls between 40 and 80 years old.
Some plans offer immediate annuities, where payouts commence as soon as you purchase the plan. Understanding the right time to start receiving annuity is crucial for the retirement planning process, as it dictates when you will have access to your retirement savings.
Pension Plan with Life Insurance Cover
A retirement or pension plan with life cover provides you with peace of mind as it ensures the financial safety of your loved ones in your absence. The insurance gives a large payout to your dependents in the event of your unfortunate demise, allowing them to live their lives and pursue goals like higher education and marriage. Moreover, if you have outstanding obligations like a home loan, it enables them to retain ownership of your home.
FAQ's about Retirement Planning
1 What is the 4% rule in retirement planning?
The 4% rule in retirement planning helps you make your funds last for 30 years. The rule states that you should withdraw only 4% of your corpus in the first year, and for every subsequent year, raise the withdrawal amount enough to keep up with inflation.
2 Why do you need retirement planning?
Retirement planning ensures financial security in your golden years. It helps bridge the gap between your working income and retirement expenses, fostering peace of mind and the freedom to pursue your post-workday dreams.
3 What are the 3 R’s of retirement?
The 3 R’s of retirement are:
1. Retirement Planning – It involves setting aside a portion of your income through your working years so you have enough to support you once you retire.
2. Regular Income – Once you retire, you should have the means to get a regular stream of income. For example, purchasing a pension plan or annuity helps you enjoy a regular income to cover your daily expenses and maintain your standard of living.
3. Risk Management – Once you retire, you must manage and mitigate risks as far as possible. You can invest in low-risk investment instruments that provide steady returns to combat the impact of inflation on your savings.
4 What are basic retirement plans?
India offers two types of retirement plans, Pension Plans and Annuity Plans. The two often work together to secure your finances once you retire. You can purchase a pension plan in your 20s and 30s. The money you put into the plan gets invested on your behalf and builds up a corpus for your retirement. You can then use the corpus to purchase an annuity that provides regular payouts for the rest of your life.
5 What are some effective ways to plan for retirement and achieve financial goals?
Strategic retirement planning involves setting realistic goals, understanding your time horizon, and choosing suitable investment vehicles. Early and consistent savings, along with regular portfolio reviews, are crucial for building a secure financial future.
6 What is the retirement lifecycle?
The retirement lifecycle has three phases:
1. Pre-Retirement Stage – During this time, individuals are working and focusing on saving and investing for retirement.
2. Retirement Stage – Just after retirement, people in this stage rely on their investments to take care of their day-to-day expenses.
3. Post-Retirement Stage – At this stage, people may require additional support while dealing with age-related health concerns. Some individuals may require long-term care, which will only be possible through adequate financial planning in the pre-retirement stage.
7 What is the legal retirement age in India?
The legal retirement age in India varies across sectors. The private sector does not have any stipulated age limit. For Central Government employees, the retirement age is 60, while State Government employees have to retire at 58. For Defence personnel, the retirement age depends on their rank. Soldiers in the army likely retire between 35 to 37, while officer’s can retire at 58.
8 What is the ideal income I need in retirement?
The amount you need once you retire depends on your standard of living and expected expenses. For example, individuals who live on rent will likely require more than those who have their own homes and only have to worry about maintenance and taxes. You can use an online retirement planning calculator to better understand how much you would require.
9 When is the right time to start planning for retirement and how much do I need to save to prepare?
The ideal time to begin retirement planning depends on your circumstances, but starting early maximises the effect of compounding. Determining your savings target involves factors like desired lifestyle and retirement income sources. Financial advisors can create a personalised plan.
10 What is deferment?
Deferment refers to the strategy of delaying retirement and continuing to work beyond the traditional retirement age. The approach helps people boost their savings and delay the withdrawal of their retirement funds. It can also help people stay active and maintain their physical and mental well-being.
11 What is retirement planning?
Retirement planning is a process of setting aside assets for retirement, so that one can lead a comfortable life and be financially independent even after they stop earning regular income. In a nutshell, it is a savings programme that manages assets and risks post-retirement.
12 What are the steps in planning your retirement?
There are a few steps that you must keep in mind while planning your retirement. The first step is to define the financial goals and the amount that is required to meet those goals. Next, evaluate the retirement date to figure out the investment horizon. You can use a retirement planning calculator to understand how much is needed to grow your wealth before retirement. The last step is to purchase a retirement plan and pay regular premiums to create a large corpus for a financially secure future.
Here's all you should know about Retirement Plans.
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- As per Income Tax Act, 1961. Tax benefits are subject to changes in tax laws.
- Amount of guaranteed income will depend upon premiums paid subject to applicable terms and conditions.
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