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Tax Benefits of Various Pension Plans

Tax Benefits of Various Pension Plans
November 04, 2016
Your life after retirement should be as comfortable as it was while you were still working. However, that will only happen if you spend some time planning the financial security of your future. A steady flow of income even after you have hit the retirement milestone will allow you to sustain the same lifestyle without making any compromises. And the sooner you start investing, the greater your returns will be. This is where a pension plan comes into the picture.

Pension plans, also known as annuity plans, provide a regular flow of income to those who have retired. You, the policy holder, can choose the exact date on which you want to start receiving your pension. Most plans also come with an insurance cover that can be claimed in the unfortunate case of the policy holder's demise.

Apart from future security and insurance protection, investing in a pension plan also qualifies for some tax benefits under Section 80CCC. Let's take a look at the various plans you can choose from and the kind of benefits they offer:

  1. Immediate Annuity:

  2. This is a guaranteed pension plan, which means you will receive a regular stream of income in exchange for a one-time lump sum investment. This income will start flowing in immediately and provide you with a fixed amount of money per month.

    The biggest tax benefit of an immediate annuity plan is that while the interest is taxed as ordinary income, the principal is exempt from taxes as it is a return of your investment. However, once you have received the principal amount in full, the payments will be fully taxable. The good thing about this is that the income tax rate will be based on the income earned at the time. Assuming that you withdraw the money after retirement, the rate will be relatively low.

  3. Deferred Annuity:

  4. A deferred annuity plan delays payment of income till the time you choose to receive it. There are two phases in a deferred annuity plan: Accumulation Phase and Income Phase.

    In the Accumulation Phase, you will pay the premium at regular intervals to the plan provider. When the Income Phase begins, you will be able to withdraw 1/3rd of the money saved, while the remaining amount will be used to purchase an annuity product, which will create a source of regular income for the rest of your life.

    The tax benefit of a deferred annuity is that it lets your income grow tax-free during the Accumulation Phase. This means you will not have to pay any taxes on the money that accumulates during the time of premium payment.

    It is never too early to start planning for your future. Now that you know all the tax benefits attached to pension plans, you should invest in the plan of your choice as soon as possible to enjoy a steady and carefree life after retirement.

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Francis Rodrigues 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.

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Vishal Subharwal 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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We at HDFC Life are committed to offer innovative products and services that enable individuals live a ‘Life of Pride’. For over two decades we have been providing life insurance plans - protection, pension, savings, investment, annuity and health.