4 Types of Pension Plans With Tax Benefits

It is never too early to invest in pension plans. These plans ensure that you are financially independent even after your retirement and are a great way to enjoy a monthly source of income, after the end of your salaried life. Some pension plans also help save a lot on the income tax on PF savings, the insurance gratuity amount, or the government pensions that you become entitled for after your retirement.

Thankfully, there are several pension plans available in India, that offer attractive saving options along with amazing tax benefits.

Below listed are the top 4 pension plans in the Indian Market.

1. Deferred Annuity Pension Plans

A deferred annuity pension is a type of annuity contract that ‘defers’ or delays the payment on the income until the insurer chooses to receive them. A deferred annuity pension plan essentially works in two phases-

• Savings Phase
• Income Phase

Saving Phase: In the saving phase, the policyholder keeps on paying the premium for the pension plan as per the decided tenure.

Income Phase: The income phase allows you to withdraw 1/3rd of your saving amount, while the remaining money gets invested into annuity products to enjoy a regular income.

Tax Benefits on Deterred Annuity Pension Plan

There is no taxation during the saving phase under these pension plans unless you wish to withdraw the corpus.

2. Immediate Annuity Pension Plans

Immediate Annuity Pension plans demand a one-time investment in lump sum amount. The pension begins immediately after the investment and is received as a regular pension "payout" for the rest of the life either monthly, quarterly or annually.

Tax Benefits on Immediate Annuity Pension Plan

The premium paid on immediate annuity pension plans is exempted from tax under Section 80 C of the Income Tax Act.

3. National Pension Scheme

National Pension Schemes (NPS) are government pension schemes that encourage people to invest in pension plans during their employment tenure. After retirement, the NPS holder can take out a percentage of the corpus accumulated, while the remaining amount is received as monthly pensions. NPSs are early retirement plans that are ideal for people working in a private sector and don’t get pensions after retirement.

Tax Benefits of National Pension Scheme

For salaried employees, a maximum deduction of 10% of the total salary can be claimed under Section 80CCD(1) of the Income Tax Act. For self-employed taxpayers, the maximum limit of NSP is 20% of their gross income.

4. Unit-Linked Pension Plans

Unlike traditional pension plans that are mostly government entities, Unit Linked Pension Plans are generally offered by insurance companies. These plans involve investing in equity markets and are more ideal for people looking for long-term retirement benefits. Unit Linked Pension Plans have a lock-in period of minimum 5 years and the chances of accumulating a large corpus is high from their equity investments.

Tax Benefits on Unit Linked Pension Plan

Annually, an investor can enjoy tax exemptions on INR.1,50,000 under Section 80C of the Income Tax Act for the Unit Linked Pension Plans. One can always consult a tax advisor before making a decision.

Things To Keep In Mind Before Buying A Pension Plan-

• Any investment you make today in a pension plan is going to reflect on the returns at the time of retirement. Hence it is important that you go through the features and benefits offered by different pension plans available in the market and choose an early retirement plan that best suits your retirement financial goal.
• Make sure you get absolute clarity on the guaranteed pension/income from your pension plan. You can use an online retirement planning calculator to estimate this amount.
• While tax benefits is a primary attraction for any given pension plan, make sure you also watch out for provisions such as liquidity and partial withdrawals in the pension plan.