Know the tax treatment of your dream pension plan before signing for one

There are various kinds of pension plans offered by different insurance companies. Employees will subscribe to pension plans as per the scheme subscribed by the employer. You can purchase an individual pension plan to fulfill your financial requirements during the golden years. Before buying a pension plan, you should understand the taxation norms. It is true that you can get tax exemption on the pension premium and you should also get the benefit on the returns.

Tax exemption on the premium

As you subscribe to the Pension Plan, you will contribute premium as per the term of the policy. The premium paid up to Rs. 1.5 lakh can be reduced from tax under 80CC of the Income Tax Act. However, the total deduction that you can claim under the 80C should not exceed Rs. 1.5 lakh. There are various savings and insurance products which can be claimed under Section 80C. These products include PPF, Employee’s Provident Fund, NSC, LIC, ELSS and 5-year bank fixed deposits.

Unit Linked Pension Plan (ULPP)

  • The premium paid under ULPP can be deducted under the Section 80C of the income tax Act.
  • If you surrender the ULPP, the surrender value will be taxable in the year of receipt.
  • At maturity, one-third of the corpus will be tax-free under Section 10 (10D) of the Income Tax Act. The rest of the money should be used to buy the annuity.
  • The annuity will be treated as income and income tax will be levied as per the applicable tax slab.
  • If the policyholder dies, the amount will be tax-free under Section 10 (10D).

Contribution to Pension Account

Section 80CCC

Under Section 80CCC, individuals will get income tax benefit by investing in pension funds. The tax exemption can be claimed under VI-A in a financial year. Resident individuals, as well as non-resident individuals, will get tax benefit under the Section 80CCC. The deduction is not applicable to HUF (Hindu Undivided Family).

The deduction under 80CCC can be claimed in the financial year in which the insurance premium is paid. If you pay the premium in the year 2017-18, it should be claimed in the Financial Year 2017-18 (or Assessment Year 2018-19) as per the income tax act. Even though you forget to contribute to the pension fund in the previous year, the additional excess amount paid in the current year will not be accounted under the income tax assessment.

If the policy is surrendered before the maturity date, the amount received from the insurance company will be taxable. In this case, the amount deducted under Section 80CCC will be taxable at the time of receipt.

Section 80CCD

The employee contribution towards the pension account will be exempt from income tax under Section 80CCD (1).

If the taxpayer is an employee, he/she can claim a maximum deduction of 10% of the salary.

If the taxpayer is a self-employed individual, 10% of gross total income or Rs. 1.5 lakh whichever is less is permitted. However, the maximum deduction has been increased to 20% of gross total income from the financial year 2017-18.

However, you should not forget the fact that the combined total deduction under Section 80C, 80CCC, and 80CCD (1) is Rs. 1.5 lakh.

Section 80CCD (1B)

The contribution to NPS up to Rs. 50,000 is offered as an additional deduction under the Section 80CCD (1B). The contribution to Atal Pension Yojana is also eligible for income tax deduction under Section 80CCD (1B).

Section 80CCD (2)

The employer’s contribution to the employee’s pension fund will be deducted under the income tax act as per the Section 80CCD (2) up to 10% of the salary of the employee. There is no ceiling on the deduction under this section.

Tax on death claim proceeds

The sum assured due to the death of the policyholder will be paid to the beneficiary (nominee). The amount is tax-free in the hands of the beneficiary.

Tax on annuity

The money that is earned through the annuity after the vesting period will be treated as income in the hands of the policyholder. It will be taxed as per the tax slab of the individual.

Returns on the joint policy

In case of the joint policy, the amount received by the survivor will be taxed as per his or her slab.


There should be a continuous flow of money after retirement so that you can manage the lifestyle without any issues. During the old age, you will not have earnings and the expenses will increase. Hence, you should subscribe to the best pension plan to take care of your financial needs. The tax implications will also play an important role in the calculation of returns. Instead of going through unpleasant surprises, you should be aware of the income tax guidelines on the premium as well as returns.

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