How Can You Protect Your Pension Plan from Taxes?

Pension plans are the driving force for secure and peaceful retirement life. They provide financial assistance to manage daily expenses, short term medical emergencies and other family commitments. However, to make the best out of pension plans, you must invest in a pension plan for a longer duration to accumulate a huge retirement corpus. And, if you have decided to do so, it is equally important to save your pension policy from taxes* to benefit even better. So, let us understand pension plans and save it all from taxes^*.

What Are Pension Plans?

Pension plans are financial solutions that provide a regular income after retirement. There are two phases in pension plans: the accumulation and vesting phases. The vesting phase is also referred to as the annuity phase. During the accumulation phase, you will pay an amount regularly for a long period to make the retirement corpus.

At the end of the accumulated phase, you can purchase an annuity plan with the retirement corpus to provide a regular income for the rest of your life in the vesting phase. You can either start receiving the regular income immediately with the immediate annuity plan or defer it for a certain period with the deferred annuity plan.

How to Protect Pension Plans From Taxes?

Pension plans qualify for a tax* deduction and exemption benefits under the Income Tax Act, 1961. Here is a detail about it to help you protect yourself from taxes.

Pension plan income tax deduction

Section 80C of the Income Tax Act, 1961, provides a tax* deduction on the taxable income up to ₹ 1,50,000 for various investments made in financial instruments for saving, investment and retirement benefits. It includes investments made in life insurance plans, Public Provident Fund(PPF), Senior Citizen Savings Scheme, National Savings Certificate(NSC), etc. It helps individuals invest in the long term for savings to accomplish money goals for themselves and their families. In addition, the fund accumulated in such a savings plan can also purchase annuity pension plans to receive a regular income throughout life.

For instance, you can purchase the Tata AIA pension plan, Tata AIA Life Insurance Fortune Guarantee Pension (UIN:110N161V02), with a single premium payment. The plan offers a life cover and the choice of annuity options, whether immediate or deferred. You can also allocate a fixed portion of the annuity for health care expenses with the health wallet benefit. Moreover, the plan provides guaranteed¹ additions and the choice of riders^# for enhanced financial assistance to manage unprecedented situations.

Section 80CCC is a subsection of Section 80C that provides tax* deduction on premium paid for pension plans issued by life insurance providers. However, it is important to note that the total allowable deductions under Section 80C and Section 80CCC are ₹1,50,000.

Apart from the pension plans provided by life insurance companies, the National Pension Scheme(NPS) is a pension plan provided by the government to benefit individuals planning for their retirement. A portion of the fund invested in the NPS goes to securities investment for market-linked returns.

Investments made in the NPS qualify for tax^* deduction benefits under Section 80CCD of the Income Tax Act up to ₹50,000. It is over and above the deduction provided under Section 80C. Therefore, the total allowable deduction for pension plans under Section 80C, 80CCC and Section 80CCD will be ₹ 2,00,000.

The Government of India encourages people to invest in such productive pension plans to secure their retirement with regular income. And, so pension plan tax^* benefit is a reward to such investors.

Pension plan taxes exemption

Pension plans also qualify for tax* exemption benefits. One-third of the retirement corpus accumulated and provided to you for purchasing annuity options get eligible for tax^* exemption benefits. The remaining portion will be taxable based on the income tax slab rates applicable to you.

How to Plan Your Finances to Save Income Tax^* On Pension Plans?

We have seen the basic features of a pension plan and the tax benefits as applicable to them. However, suppose you want your pension plans to be applicable for maximum tax^* benefits. In that case, you have to ensure you diversify the investments made in pension plans offered by insurers and NPS.

Based on your current lifestyle and future family commitments, you can derive an estimate of the amount required for your retirement expenses. You should also ensure a fund for accommodating medical expenses if any. Based on this estimate, you can decide on the premium and the policy term. Invest long-term to accumulate a higher fund while paying an affordable premium to be eligible for tax* benefits.

If you feel you are a prominent source of income for your family's survival, then choosing to invest a major proportion of the fund to buy pension plans will help you in the longer term.

Conclusion

Financial planning is the secret to happy and peaceful retirement life. Pension plans provide a great advantage helping you accumulate a higher sum for retirement and vesting it later to purchase an annuity for regular income during retirement. The investment made and the returns earned qualifies for a tax* deduction and exemption under the Income Tax Act, 1961. Life insurance annuity plans provide a life cover, rider^# benefits, flexible premium payment options and guaranteed¹ additions as part of the pension plans. You can choose between the immediate and the deferred annuity plans as well. So make your decisions wisely, save on tax, earn more and secure your retired life!

L&C/Advt/2022/Feb/0235