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Types of Pension Plans and Their Tax Benefits

Shockingly, more than half of the Indian population doesn’t have a retirement plan. Plan a tax-free pension income that help you to lead a stable life post-retirement, today.

  • 3,073 Views | Updated on: May 17, 2024

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 needed. 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 tax on pensions in India, plans to safeguard their families 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 income stream to sustain your expenses.

b) Immediate Annuity Plan

You must pay a lump sum 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)Section 80CCC of the Income Tax Act provides for the deduction of deferred annuity premiums from your taxable income up to ₹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’ interests, as there is only one lump sum premium under this scheme.

2)Pension payments post-retirement

a) Commutation

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 tax-free 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.

Taxability of Commuted and Uncommuted Pension

An annuity fund, which pays the taxpayer’s pension out of the fund, is often one to which the employer and the taxpayer both contribute. You have the option of receiving a portion of your tax-free pension early when you retire. The term “commuted pension” refers to such an advance pension. For instance, suppose that at the age of 60, you will receive an early payment of ₹10,000, or 10% of your monthly pension, for the following ten years. You will receive this in one lump sum payment. Your commuted pension is 10% of ₹10,000 times 12 times 10, or ₹1,20,000. Up until the age of 70, you will continue to get ₹9,000 (your uncommuted pension), and then you will start receiving your full pension of ₹10,000.

How is the tax on pension calculated for both of these types?

1. Commuted pension

Depending on the industry you work in, the tax treatment of this sort of pension may vary. Take note of the following.

a) Employees of municipal authorities or corporations created by federal, state, or local legislation are exempt from taxation under Section 10 if they receive a commutated pension (10A)

b) Following Section 10, other employees must pay tax on a portion of their commuted pension (10A).

The tax exemption for workers who receive a gratuity in addition to their pension is equal to one-third of the total amount of the commuted pension.

For workers whose pension does not include gratuities, the tax exemption is equal to half of such converted pension.

2. Uncommuted pension

All employee types and business sectors are fully taxable on this sort of tax-free pension.

Wrapping Up

You can lower your taxes and get Section 10(10D)* tax relief on the maturity amount by investing in ULIPs made exclusively for retirement. By adopting these long-term goal-based investing channels, you can generate returns on capital market assets that are inflation-adjusted. However, your equity exposure is decreased with balanced funds.

The size of your invested corpus and its returns will determine how much of a tax-free pension you can receive each month. As a result, starting early with pension investments can help you save more and earn more. Therefore, research the top pension plans online and begin preparing for retirement right away.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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