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.
In this article, let us get into the nitty-gritty of pension plans in India.
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.
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.
Listed below are some of the major advantages offered within a pension plan:
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.