FOR EXISTING POLICY
FOR NEW POLICY
A pension plan is a savings and investment tool that requires you to make regular payments throughout your working years. The payments you make are invested in a fund/asset of your choice for a set number of years, and you receive a steady flow of income in your retirement years.
Whether you are an employee, employer, or individual, having a thorough understanding of how pension plans work is crucial. With ever-growing inflation rates, retirement plans have become a necessity even if your bank account has considerable savings. They help you gather funds throughout your working years to support you after retirement by paying you a regular stream of income.
Read on to learn what is a pension scheme and how it works so you can enjoy the golden years of your life without worrying about your finances!
What is a Pension Plan?
A pension plan, often called a pension scheme, retirement plan, or guaranteed1 pension plan, allows you to invest a portion of your income into assets/funds of your choice. These can be stocks, bonds, real estate, or other investments that generate returns over time.
These accumulated payments and returns are paid out as a retirement benefit when your policy matures. The payouts are usually in the form of a regular income stream or a lump sum after you retire.
How do Pension Funds Work?
Pension plans in India comprise two stages: Accumulation and Distribution.
Accumulation Phase
The premiums you pay to your retirement plan are invested into a fund/asset for a set period.
Distribution Phase
On plan maturity, you will receive your retirement benefits. You have two choices when you reach this phase: start receiving your retirement benefits or withdraw your earnings and buy an immediate annuity plan.
The annuity plan must be bought from the same insurer you bought your pension plan from.
Types of Pension Funds
Pension Plans With and Without Life Cover: Life insurance pension plans come with or without life cover.
Plans with a life cover will cover the insured for the entirety of their lives and will pay family members a lump sum if the insured dies. Plans without a life cover do not offer this benefit, and all pension proceeds go to the nominee.
For example, immediate annuity plans are without-cover plans, while deferred plans come with a life cover.
Deferred Annuity: It is a pension fund where your investments are not taxed until withdrawal, and pensions are provided upon completion of the policy tenure.
Immediate Annuity: You start receiving your pension immediately after depositing your lump sum into the plan. Here, your investment amount is tax-free, while the annuity payments you receive are taxed* as ordinary income according to your tax slab.
National Pension Scheme (NPS): It is a government-backed retirement plan where a minimum of 40% must be used to buy an annuity plan while the rest (60%) can be withdrawn on maturity. The 60% immediate withdrawal is tax-free, while the annuity payments are taxed accordingly.
Pension Funds: These are long-term retirement plans where six companies operate as fund managers and are regulated by the Government under the Pension Fund Regulatory and Development Authority (PFRDA).
Guaranteed Period Annuity: Here, the annuity is paid regardless of whether you survive the duration. The annuity options are for 5, 10, 15, and 20 years.
Annuity Certain: You pick the number of years where you receive guaranteed1 annuity payments. In case of death, your nominee will receive the proceeds.
Life Annuity: You are paid annuities for your lifetime. Upon death, your nominee will receive the payments.
Key Features of Pension Plans in India
Guaranteed1 Maturity Benefit: All pension plans in India offer a guaranteed maturity benefit. These are generally the fund value or 101% of the premiums paid, whichever is higher.
Guaranteed1 Death Benefit: Pension plans also offer a death benefit - if you pay your premiums regularly and on time. This benefit will equal 105% of the total premiums paid, including all top-ups (if any), and will be paid to your policy nominee upon death.
If the pension fund is discontinued, the previously accumulated funds in the policy will be paid to the nominee.
How are Pension Funds Taxed?
General Taxation*:
Your contributions/premium payments towards your retirement plans are eligible for tax deductions up to ₹1.5 lakhs per year under Section 80C, Section 80CCC, and Section 80CCD. The ₹1.5 lakhs deduction is the overall deduction amount clubbed from all three Sections.
Only one-third of the amount you receive (after reaching retirement age) through the pension plan is tax-free. The rest of the money is paid as an annuity and is subject to tax depending on your income tax slab rate.
Eligibility:
Both residents and non-residents are eligible for these tax deductions for pension plans in India, except HUFs, who cannot claim deductions under Section 80CCC.
Senior citizens (over 60) can claim a standard deduction of ₹50,000 or the pension amount, whichever is less, under Section 16 of the Income Tax Act.
Benefits of Pension Plans in India
Guaranteed Benefits: You get a guaranteed income stream once you reach retirement, which you can use to cover living expenses.
Tax* Benefits: Your investments will be eligible for tax deductions under applicable tax laws, and depending on the type of retirement plan, the return you receive may be tax-exempt.
Can Be Customised: You can choose your accumulation period, maturity age, and payment period, and how you receive payouts (monthly, annual, etc.) when buying pension plans in India.
Life Coverage: Pension plans from insurers like Tata AIA will offer life insurance coverage where the sum assured amount will be paid to your family members.
Conclusion
Pension plans in India are a fool-proof way to build a retirement corpus. All you need to do is pay regular premiums or a lump sum on policy purchase, which will then be invested into a fund or asset of your choice for a set number of years to accumulate returns.
On policy maturity, the accumulated returns and premium payment(s) under the retirement plan are paid to you at regular intervals as a pension until the amount is exhausted. If the policyholder dies, this amount can also be paid to family members or a policy nominee.
