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Tax Benefits Associated With Retirement Plans

Updated On Jan 04, 2022

Retirement plans are frequently referred to as pension plans. You can put a portion of your salary into these plans. The primary goal of a pension plan is to provide a steady income after retirement. Given the ever-increasing rate of inflation, it has become vital to invest in these programmes. As a result, even if you have a sizable savings account, you may require a pension plan.

It is also taxable if you receive a normal pension. The taxation is different depending on whether you receive a lump payment (commuted pension) or instalments over time (non-commuted). The commuted pension is tax-free for government employees. Others must pay taxes on half of the commuted amount if gratuities are included. If you don't receive gratuities, one-third of your commute is tax-free. Non-commuted pensions, on the other hand, are treated as salary and are subject to current tax rates.

Tax deductions are available for donations of up to Rs 1.5 lakh contributed to a pension plan under Section 80CCC. This comprises the cost of a new pension plan or the cost of renewing an existing one of a comparable sort. This section allows residents and non-residents to seek tax deductions. Hindu Undivided Families (HUFs), on the other hand, are not eligible to bring such claims under the applicable clause.

However, withdrawals are not tax-free. Only one-third of the money received from a pension plan by a retiree (shortly after attaining retirement age) is tax-free. The remainder is paid as an annuity and is taxed. It is dependent on the rate of the retiree's income tax slab.

Retirement Plan Tax Benefits

  • Growth That Is Tax-Free

a) Accrued interest in pension plans is tax-free; 

b) Withdrawals of interest before maturity for plans like Invest 4G are also tax-free.

In India, pension schemes provide the following tax benefits:

  • Section 80C Benefit

a) Up to Rs 1.5 lakhs in annual investment is deductible.

b) Up to Rs 50,000 additional deduction for selected investments

  • Invest 4G Offers A Tax-Free Pension

Invest 4G's Century option allows you to create a corpus and earn a tax-free pension from it. Here's how to do it:

  1. At the age of 30, begin investing up to Rs 2.5 lakhs annually.
  2. Ensure that the policy's life insurance is always ten times the annual investment.
  3. At the age of 60, stop investing and apply for a planned withdrawal.
  4. Begin taking advantage of a tax-free pension.

If you purchase the plan on or after February 1, 2021, be sure that your total annual investment in all ULIPs does not exceed Rs 2.5 lakhs.

  • Maturity Proceeds Are Tax-Exempt

If the investment conditions are met, the maturity proceeds from a life insurance pension plan are tax-free.

What To Look For When Choosing A Retirement Plan

You must be clear about your financial goals before purchasing a pension plan. You should choose a pension plan that is tailored to your specific objectives. The following are the several objectives for which a suitable pension plan is required:

i) After Retirement, Regular Income

After you retire, you'll need a reliable source of income, which can include:

a) Ensure a steady source of revenue over time

b) Life insurance or a source of income for your spouse if you die.


Depending on their risk profile, pension funds allow investors to participate in either secure government assets or take on some risk and invest in debt and equity transactions. The risk is mitigated by the possibility of bigger returns from the investment.

Also read - Understanding The Working of Pension Plans

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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