Beginners Guide - Pension Plans in India

The pension plans are an ideal way to protect post-retirement financial stability. The pension plans are essentially maintained by the employer to shield you against any uncertainties that may occur at any point in time post you retire.

  • Peaceful Post-Retirement Life

  • Tax Free Regular Income

  • Wealth Generation to beat Inflation

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In this article, let us get into the nitty-gritty of pension plans in India.

What Does a Pension Plan Mean?

The pension plan is also referred to as the retirement plans. With this, you can invest a portion of your hard-earned income into a designated plan. The prime objective behind any of the pension plans is to have a steady flow of income after retirement.

With the rising inflation, investing in a pension plan is of prime importance. Let us just understand that even if you have savings in your bank account, you might still need the pension funds in the coming times. This may happen because the savings might get exhausted in meeting the everyday unavoidable expenses. Therefore, with the correct plan in place, the pension funds will always support you when any other source of income ceases to exist.

The pension plans ideally have two stages in India that are the stage of accumulation and stage of vesting. The investors need to pay the yearly premiums until they reach the retirement age in the former. Once the age of retirement is reached, then only the stage of vesting commences. At this stage, the retiree will initiate receiving the annuities till their demise or the nominee’s demise.

Is There Any Tax Implications of the Pension Plans?

You should know that the contributions made to the pension plan remain tax exempted with the highest ceiling of Rs 1.5 lakh within Section 80CCC. The contributions also include the sum that is spent upon purchasing a new pension plan or even renewal of the existing plan of a similar nature. The non-residents and the residents can easily claim the tax deductions offered under this section. It is to be noted that a Hindu Undivided Family member is not entitled to make any claims within the section.

Moreover, the withdrawals are not tax-free. Once you reach the retirement age of one-third of the corpus is then distributed by the pension plan, which is tax-free. The remaining sum is then distrusted as an annuity also subject to taxation on the premise of the rare of tax for the retiree during retirement.

Understanding the Advantages of the Pension Plans

Listed below are some of the major advantages offered within a pension plan:

  • Long-term Savings: The pension plans serve as the long-term scheme of savings irrespective of whether you select multiple payments options of the small sum or a lump sum payment, the savings are assured. The pension plan helps to create annuity that can be invested later giving rise to a steady flow of income post the retirement.
  • Life Insurance Cover: There are pension plans available in the market, which offers lump sum amount either when an individual retires or in case of demise, whatever situation occurs earlier. This essentially means the pension plan also serves as the life insurance cover.
  • The Alternative in Investment: The pension funds give an investor the alternative to either go for equity investment on the premise of the risks or with safe government securities. The risk is levelled by the anticipation of greater returns, which is generated by an investment.
  • Choose to Get Paid:  On the premise of the age and the plans, you can easily invest with a lump sum amount and instantly receive the annuity payments. Another option you have is to choose the deferred annuity plan that will let the corpus earn interest until the payouts commence.
  • Avail an Amount During Emergency: You are permitted to make the adjustments the pension plan to avail the lump sum payout in case of any emergency. This is generally done to cover long-term health care.
  • The Effect of Inflation: It is one of an ideal way of negating inflation effect by simply investing in the pension plans. The pension plans will pay a lump sum at the phase of retirement that sums to the higher of one-third of the corpus accumulated and the remaining one-third corpus is then used to generate the cash flow steadily.

The Bottom Line

The ideal time to invest in the pension plan is as early as possible. For instance, if someone is 21 years of age the substantial returns will be more when compared to someone who is 30 or 35 years of age. The pension plans also qualify for a tax deduction, however, the highest allowed deduction upon the life insurance premium is of Rs 1.5 lakh within the Income Tax Act of 1961. In case you receive the annuity after the retirement, then it will be taxable on that date itself.

Just ensure the payout during the retirement is sufficient as you might look for investment options with risks so that you can generate higher returns. The conventional non-risky investment alternative might not be sufficient to override the inflation effects.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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