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Tax Benefits in Retirement Insurance Plans

If you are in the young phase of your career and feel that you have plenty of time to start thinking about a retirement plan, you are mistaken. The younger you start, the higher your chances of building a larger corpus, and at a reduced premium eligibility. However, merely investing in a pension plan that you believe is best suited to your specific circumstances is insufficient. Before making a conscious decision, you need also be aware of the tax benefits and exemptions applicable to each of these pension and retirement plans.

Tax Benefits in Retirement Insurance Plans

Different sections of the Income Tax Act which provide benefits towards retirement plans are as follows - 

Section 10(10) - Gratuity for Pension Plan

  • Retirement or death? Gratuities received by those employed by the Central Government, State Government, Defense, or local authority are tax-free.
  • Any gratuity received by individuals covered by the Payment of Gratuity Act of 1972 is exempt subject to the following conditions:
  • Gratuity is exempt up to the amount of the individual's last received salary for 15 days for each completed year of service.
  • The total annual exemption cannot exceed Rs. 20 lakh, according to the computation above. This value has been increased from the previous maximum limit of Rs. 10 lakh, according to provisions announced on March 29, 2018.
  • Gratuity received by employees who are not employed by the Central Government, State Government, Defense, or local government is excused subject to the following rules and conditions:
  • For each completed year of service, the exemption cannot exceed the wage for half a month based on the average salary drawn in the previous ten months.
  • If the gratuity was paid at least once in the previous fiscal year and the individual claimed tax exemptions, the exemption in the current year will be limited to Rs. 10 lakh.
  • Section 89(1) of the Income Tax Act of 1961 provides tax relief for the taxable portion of a gratuity. According to the laws of August 21, 1990, gratuity paid to a widow or other legal heirs in the event of the death of an employee while gainfully working shall be excluded from income tax.

Section 10(10A) - Pension Amount Received from A Retirement Plan

  • The entire commuted pension sum is exempt from taxation for employees of the Central Government, State Government, Defense, and any municipal body or Corporation formed by Central or State Acts.
  • Individuals working in any area other than those listed above are exempt from paying taxes on a gratuity equal to one-third of their pension. Otherwise, the commuted value of half the pension amount is exempted, according to the circular of January 6, 1992. Section 10(10AA) - Encashment of leave as part of a pension scheme
  • Leave encashment is entirely taxable for persons who are gainfully employed, according to the provisions of Section 89(1) of the Income Tax Act of 1961.

Section 10(10B) Retrenchment Compensation 

  • As part of a retirement strategy Retrenchment compensation is defined as remuneration earned by employees under the Industrial Disputes Act of 1947 or any other Act that qualifies for tax exemption according to the conditions listed below.
  • Compensation equal to 15 days' salary, calculated on the previous drawn wage, for each completed year of continuous employment, or at least for more than 6 months.
  • As mentioned in the circular dated June 25, 1999, the tax exemption on this compensation cannot exceed Rs. 5 lakh for layoff on or after January 1, 1997.

Endnotes

Pension schemes financially protect retired employees, protecting them from both planned and unplanned problems. Clearly, the Income Tax Act of 1961 has a slew of measures for tax breaks to help retirees who have chosen a pension plan. All you have to do is be aware of these tax breaks so that you can make the best decisions for your retirement plan.

Also read 

Benefits of Riders in Retirement Insurance

Can I Get Any Discount When Buying Retirement Insurance Plans Online?

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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