Protect your pension plans from tax

Retirement marks the start of a new phase in a person’s life. However, without a regular source of income in your post-retirement years, you must rely completely on your savings and investments. That may not be sustainable in the long-term. Here lies the importance of a pension plan.

The general idea of a pension plan includes: First, you pay a set amount on a regular basis until you retire. Once you retire, you will get a continuous stream of income for the rest of your life. However, pensions are taxable in your income tax return. Hence, to enjoy steady retirement benefits from pension plans, you must have an idea of how to protect your pension plans from tax.

Some sections of the Income Tax Act, 1961 exempt certain pension plans from tax. Here’s a list of some such pension plans:

·         National Pension Scheme (NPS) – This was established by the Indian government as a financial cushion for retirees. Under the pension scheme, you can begin investing between the age of 18 and 65 and your money is invested primarily in four different asset classes – equity, government securities, corporate debt, and alternative investment funds. You have the flexibility to choose the proportion as per your preference, which will, in turn, determine the returns. At maturity, age 70, you receive 60% of the proceeds while the remaining are put towards an annuity scheme.


·         Public Provident Fund (PPF) – The PPF, a government-run pension fund, is a long-term investment plan that lasts for 15 years. As a result, compounding has a huge impact, especially at the conclusion of the term. In your PPF account, you can put a maximum of Rs 1.5 lakh each year. Section 80C of the Income Tax Act allows you to deduct your PPF contributions as a tax deduction. In addition, what you earn as interest is tax-free.

·         Employee Provident Fund (EPF) – The EPF is a government-sponsored savings program for salaried workers. Under it, both you and your employer are required to contribute equally to your EPF account.

·         Annuity programs that include life insurance policies – These plans serve as a life insurance policy as well as a regular income stream. Your family member receives a lumpsum payout if an ill-fated event occurs while the plan is active.

You can also refer to Chapter VI-A of the act, which includes sections 80C, 80CCC, and 80CCD, and goes into great depth about such plans.

In addition to investing in pension plans with tax benefits, here are some other ways you can invest to build your retirement corpus and enjoy tax-free retirement benefits.

It may be prudent to invest a portion of your retirement fund in financial instruments with a tax-free annual outflow, or maturity amount. For example, retirees can invest in tax-free bonds, which give out tax-free interest.

Bank FDs are a solid source of income after retirement. It is a good place to put some of your retirement money as it will remain safe for the long term. Also, banks give senior citizens a 0.5 percent higher annual interest rate.

Furthermore, there are income tax benefits on some types of life insurance policies, too, under sections 80C and 10D of the Income Tax Act. Premiums paid toward life insurance policies are eligible for a deduction as mentioned under section 80C. The amount of deduction can be up to Rs 1.5 lakh. Even yet, capital gains are not taxed, provided they do not exceed 10% of the amount guaranteed or if that value is at least tenfold the premium (10D).

Final thoughts

It’s essential to consider tax-saving and retirement planning when thinking of your long-term financial plan and investment portfolio. That’s because by the time you retire, your living expenses would have increased. You must also have a ready budget for medical emergencies and other unforeseen costs. Hence, meticulous preparation, such as a pension plan, can be of great help to support you with your retirement expenses.

Pension plans can provide you with a supplemental income, allowing you to live comfortably in your golden years. So, if you have a good strategy for a pension plan, including tax-saving, it will allow you to avail all kinds of retirement benefits.



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