How Are Pension Policies Taxed?

By Saroni Chakravarti | May 2, 2018

Pension policies can provide a regular flow of income during one’s twilight years and they come with several tax benefits too. Read on to find out more.

How Are Pension Policies Taxed?

Unless you’re already on the path of saving up for a retirement fund, buying a pension policy can prove to be especially useful for your twilight years. Insurance companies these days sell a host of pension policies that grant you a fixed sum on a monthly basis as pension money. As a policyholder, you can decide on the vested date i.e. the date from which your pension shall be payable by the insurer.

Apart from the obvious benefit of a regular income, these plans come with a host of taxation benefits too. Let’s find out more about them.

A pension plan comes with twin benefits: it allows you to claim income tax benefits against your premium payments by way of both deduction and exemption.

Let’s take a look at the taxation benefits levied on pension policies:

  1. Premium paid towards a pension plan is eligible for tax deduction u/s 80CC of the Income Tax Act up to a limit of Rs. 1 lakh.

This allowed deduction is within the Rs. 1.5 lakh limit as per Section 80C of the Income Tax Act.

Usually one can enjoy pay outs from a pension on a monthly basis, but can also choose to take pension as a lump sum (also called commuted pension) instead of a periodical payment.

Additional Reading: Pension Plans & Their Tax Benefits

Now let’s get a better understanding of the concept of commuted pension.

At the time of retirement, you may choose to receive a certain percentage of your pension in advance. This is uncommuted pension. For example, at the age of 60, you decide to receive 10% of your monthly pension in advance of the next 10 years of Rs. 10,000.

You will receive this amount as a lump sum. Therefore, 10% of Rs. 10,000 x 12 x 10 = Rs. 1,20,000 is your commuted pension. You will continue to receive Rs. 9,000 (your un-commuted pension) for the next 10 years until you are 70 and post 70 years of age, you will be paid your full pension of Rs. 10,000.

Uncommuted pension or any periodical payment of pension:

This one is fully taxable as salary. In the above case, Rs. 9,000 received by you is fully taxable. Rs. 10,000 starting at the age of 70 years are fully taxable as well.

Commuted pension or lump sum received may be exempt in certain cases. For a government employee, commuted pension is fully exempt. For a non-government employee, it is partially exempt.

Additional Reading: Personal Loans For Pensioners

If one receives gratuity along with pension then 1/3rd of the amount of pension that would have been received if 100% of the pension was commuted is exempt from commuted pension and the remaining is taxed as salary.

And in case only pension is received but gratuity is not received, then 1/2 of the amount of pension that would have been received if 100% of the pension was commuted is exempt.

However, pension received by a family member is taxed under income from other sources in your Income Tax Return. If this pension is commuted or is a lump sum payment, it is not taxable. Uncommuted pension received by a family member is exempt to a certain extent. Rs. 15,000 or 1/3rd of the uncommuted pension received, whichever is less, is exempt from tax.

For example, if a family member receives pension of Rs. 1,00,000, the exemption available is least of Rs. 15,000 or Rs. 33,333 (1/3rd of Rs. 1,00,000). Thus the taxable family pension will be Rs. 1,00,000-Rs. 15000 = Rs. 85,000.

Employees that receive their pension from UNO or their family is exempt from tax. Pension received by family members of the armed forces is also exempt.

Additional Reading: New Investor Friendly Features Of The National Pension System

Death benefit tax-free for nominee:

In case the policyholder meets an unfortunate death during the accumulation phase of the pension plan, then death claim payable as sum assured value is not taxable in the hands of the nominee.

Annuity amount is taxable and added to the income of the person receiving the annuity:

Whether it is a joint life annuity or otherwise, the annuity that one receives is added to the total income of the concerned and taxed accordingly.

Even if your retirement years are far off, it pays to start your retirement planning early. You can start by checking your Credit Score to see if it is not too low.

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.
Category: Insurance

About Saroni Chakravarti

Saroni loves all things quaint and old world- be it art, music or cinema. She has a special knack for spotting the weirdest traits in people and can't for the life of her understand why she attracts the worst co-passengers. Despite her cynical exterior, she still hopes for a world that will be free from discrimination and cruelty. When she's not spending her day commuting, she can be found watching funny videos, reading, and sending out needy vibes to strays around her.

Leave a Reply

Your email address will not be published. Required fields are marked *