How to Build a Tax-Free Pension Income for Retirement?

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How to Build a Tax-Free Pension Income for Retirement?

View Plans
  • 30th Nov 2021
  • 260

How to Build a Tax-Free Pension Income for Retirement?


Shockingly, more than half of the Indian population doesn’t have a retirement plan. Hence, it becomes hard for them to maintain their lifestyle. Planning a tax-free pension income can help you to lead a stable life post-retirement.


Once you retire from your professional life, it becomes hard to maintain a regular stream of income. With increasing inflation, it is not enough to rely only on your savings. You need additional income to maintain your standard of living. On the plus side, retirement plans can ensure the continuous flow of tax-free pension income when you need it. Essentially, you can achieve the following by investing in a retirement plan.

1) A sense of self-reliance

2) A relaxed life post-retirement

3) Assured savings

4) Emotional wellbeing

What is a Retirement Pension Plan?

Retirement plans are insurance products that provide monthly income post-retirement. Generally, you pay regular premiums that can be monthly or annual. Once you strike the retirement age, you get a life cover along with a specific amount every month throughout your life.

Insurance companies provide pension plans with or without life cover. Although, people prefer covered pension plans to safeguard their family from the uncertain events of life.

Types of Pension Plans

Various pension plans are available in India. All of them can be categorized into the following:

1) Sponsored by Insurer

The premium paid for these plans is lent to corporates or banks by the insurer. So, these plans earn income only from the debt securities. Risk-averse people should invest in a sponsored pension plan. You can choose from 2 types of annuity plans here:

a) Deferred Annuity Plan

Under this scheme, you can pay regular premiums until your retirement. Then, post-retirement, you get a regular stream of income to sustain your expenses.

b) Immediate Annuity Plan

You are required to pay a lumpsum premium under this scheme. Subsequently, you can enjoy the monthly pension payments immediately after.

2) Unit Linked Pension Plans

These plans invest your premium money mainly in equity. They also invest a portion of these funds in debt markets to gain stability. Having said that, higher chances of returns imply a higher risk due to stock market exposure. Therefore, investors having a higher risk appetite should opt for these plans.

3) National Pension Scheme

In the wake of the success of private pension plans, the Govt. of India introduced a state-sponsored pension plan in 2004. You receive units as per the NAV of the fund that you choose to invest in. Post-retirement, you are allowed to withdraw 60% of the corpus upfront and purchase an annuity scheme with the remaining 40%.

Taxation of Pension Plans

Is the pension income completely tax-free? No! Here is the correct tax treatment of pension plans.

1)Premium Paid under Pension Plans

a) Deferred Annuity & NPS

Section 80CCC of the Income Tax Act provides for the deduction of deferred annuity premiums from your taxable income up to Rs. 1.50 lakhs in every financial year.

b) Immediate Annuity

You are allowed to claim the entire premium paid for this plan as a deduction in the same financial year. This is done to protect investors’ interest as there is only one lumpsum premium under this scheme.

2)Pension payments post-retirement


You can withdraw 1/3rd of the entire corpus at once after retirement. Tax on this amount is exempt under Section 10(10A) of the Income Tax Act. The 60% commuted pension under NPS is entirely tax-free.

b) Monthly Pension

Tax is levied based on your slab rates for the monthly pension that you earn.

The monthly pension amount that you can earn depends on the size of your invested corpus and the returns thereof. Hence, investing in pension plans early can help you save longer and earn more. Explore the best pension plans online and start planning your retirement now.

- A Consumer Education Initiative series by Kotak Life

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