One of the difficult aspects of adulthood is that the more we earn, the higher our tax liability goes. Each year, the Income Tax Department puts out detailed data on returns filed by Indian taxpayers. From the fiscal year 2016 to 2017, the average Indian paid ₹58,576 in the form of their annual Income Tax. This significant amount naturally brings up questions like:
“Is it possible to reduce my tax liability by the end of the fiscal year? If so, how?”
The answer? Yes, tax liability can be reduced by investing in a pension scheme.
What are pension or retirement plans?
In India, the stats show that most Indians are not financially prepared to take on retirement. In fact, 7 out of 10 Indians expect to rely on their children for support throughout their retirement years.
In such cases, pension plans can prove to be extremely useful. Pension Schemes, also known as Retirement Plans, allow you to save a part of your earnings, typically each month, for retirement. Once you retire- based on your plan- you will receive part of your accumulated savings monthly, quarterly, or annually, allowing for a steady flow of income without the burden of employment. The best pension schemes in India offer one or both of the following tax-saving benefits:
1. Premiums paid are exempt from tax liability under Section 80C of the Income Tax Act.
2. Payouts received are partially exempt from tax liability under Section 10(10D) of the Income Tax Act.
Hence, with the right pension scheme, it is not only possible to avoid paying tax on the amount you invest but also on the amount you claim upon retirement.
What is the eligibility criteria for such exemptions?
As per Section 80C of the Income Tax Act, contributions made to a pension plan are tax-exempt up to ₹1.5 lakh. These contributions include premiums given to the existing plan, money spent on purchasing a new pension scheme, or renewing an older pension plan.
Hence, as long as money invested in a pension scheme is below ₹1.5 lakhs, it is tax-free. The opportunity to minimize tax liability on premiums and other contributions applies to both Indian residents and non-residents. One caveat in the Income Act is that this benefit does not apply to Hindu Undivided Families (HUFs).
When it comes to withdrawals, the benefit of pension schemes is that they significantly reduce tax liability, although they don’t eliminate it. For one-third of the corpus issued to the retiree, withdrawals are entirely tax-free. The remainder is distributed at periodic intervals, typically referred to as ‘annuities.’ The remaining annuities are also taxed depending on the policyholder’s tax rate at the time of retirement.
What are some other benefits of pension plans?
Another benefit of pension schemes is that they may help in avoiding inflation. As inflation occurs, the same goods and services from 20 years ago become quite expensive. The savings-aspect of pensions schemes yields significant returns for policyholders. One can expect inflation-matching returns depending on when they start investing.
There also exist market-linked or unit-linked pension plans (ULIPs) that invest in equity markets. Equity markets tend to perform better than other asset classes like bonds. ULIPs may offer their policyholders a larger accumulated corpus than traditional pension plans, thereby exceeding inflation prices. However, it is important to keep in mind that there is also more volatility in equity markets compared to others, making ULIPs an option for risk-takers.
To make the most of the tax benefits derived from pension plans, it is generally recommended that one starts soon. Pension schemes work best for early investors. Look for the right pension scheme, one that fits your needs.
In conclusion, the best pension schemes provide tax-deduction benefits on premiums and payouts. The money invested can also be protected from inflation taxes. However, it is recommended that these benefits are best accrued if one starts investing early on.
In addition to the various deductions on pension and retirement plans, a number of deductions and exemptions can also be availed on the purchase of tax-saving instruments like life insurance and term insurance, under section 80C and Section 10(10D). You can browse the website to learn more about the various Term plans offered by PNB MetLife.
The income tax is levied on all earning individuals who fall under a taxable income bracket. The income tax is paid to the Government of India and is charged annually. However, there are several tax deductions and exemptions that you can claim to lower your tax liability. The Income Tax Calculator helps you ascertain your tax output for a financial year based on your taxable income. This can help you plan well and save tax using the tax-saving deductions and exemptions, if possible.
- *Tax benefits are subject to conditions and other provisions of the Indian tax laws and are subject to amendments made thereto from time to time.
The aforesaid article presents the view of an independent writer who is an expert on financial and insurance matters. PNB MetLife India Insurance Co. Ltd. doesn’t influence or support views of the writer of the article in any way. The article is informative in nature and PNB MetLife and/ or the writer of the article shall not be responsible for any direct/ indirect loss or liability or medical complications incurred by the reader for taking any decisions based on the contents and information given in article. Please consult your financial advisor/ insurance advisor/ health advisor before making any decision.
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