How Are Pension Policies Taxed?

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    Pension plans sold by the insurance companies come in handy for your sunset years when through these schemes you secure a fixed sum on a month on month basis as pension money. The policyholder decides about the vested date i.e the date from which pension shall be payable by the insurer. And apart from helping you maintain your lifestyle there are some taxation benefits of these plans which you must know.

    How Are Pension Policies Taxed?

    Here are listed the few taxation benefits for your ready reference:

    Premium paid towards the pension plan is eligible for tax deduction u/s 80CCC of the Income Tax Act up to the 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.

    Commuted value or pension qualifies for tax exemption: Typically a pension plan comprises the accumulation phase and the annuity phase. And as the annuity begins the policyholder can retain one-third of the accumulated corpus known as commuted value or pension. This sum is tax exempt. And the rest of the amount has to be invested towards buying an annuity plan from the same insurer or a one-time or single-premium pension policy.

    And now on it is required that you decide on the annuity rate for the pension just when buying the pension policy from the insurer. However, there is offered a window to re-consider your decision just before six months time of your policy maturity.

    Death benefit tax-free for nominee: In case the policyholder meets 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, any sum received as annuity is added to the total income of the concerned and taxed accordingly.


    Surrender value is also taxed as per tax slab of the retiree: Depending on whether or not the individual has availed taxation benefits while paying premium for the policy, the surrender value is added to the total income of the pensioner and taxed accordingly.

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