1. Pension Plans
In India, Pension plans have two stages – the accumulation stage and the vesting stage. In the former, the investors pay annual premiums until the time they reach the age of retirement. On reaching the retirement age, the second stage, the vesting stage begins. During this stage of the pension plan, the retiree will start receiving annuities until the time of their death or the death of their nominee.
2. Tax Implications of Pension Plans
The contributions that are made to a pension plan, under section 80CCC, are tax-exempt up to a maximum ceiling of INR 1 lakh. The withdrawals, however, are not tax-free. It is only the one-third of the corpus that is distributed to the retiree (soon after reaching the retirement age) by the pension plan is tax-free. The rest of the money is distributed as an annuity and is subject to taxation depending on the retiree’s tax rate at the time of retirement.
3. Types of Pension Plans in India
There are pension plans that are sponsored by an insurer where the investment is solely in debt and is best suited for investors who are conservative. There are plans that are unit linked and invest in both equity and debt. The third kind of pension plan is the National Pension Scheme which invests in either in 100 percent government securities, 100 percent debt securities (other than government securities) or in a maximum of 50 percent equity.
There is no doubt that pension plans are a much safer form of investment that has multiple classifications which are based on the benefits of the plan and its structure. The classification of pension funds can be based on the following:
a) National Pension Scheme
The Government of India introduced a new Pension Scheme for people who wanted to build up their pension amount. With the scheme, your savings will be invested in debt and equity market, based on your preference. It allows you to withdraw 60 percent of the funds at the time of retirement and the remaining 40 percent is used for the purchase of the annuity. The maturity amount is subject to tax.
b) Deferred Annuity
With the deferred annuity plan, you can accumulate a corpus through a single premium or regular premiums over the term of the policy. The pension begins once the policy term gets over. This deferred annuity plan has tax benefits wherein no tax is charged on the money invested until you plan to withdraw it. This scheme can be bought by either making regular contributions, or by a one-time payment. This way it works for you whether you want to invest the entire amount at one time or want to invest systematically.
c) Pension Funds
The government body, Pension Fund Regulatory and Development Authority (PFRDA), has authorized six companies to operate as fund managers. These plans offer comparatively better returns at the time of maturity and remain in force for a substantial amount of time.
d) Immediate Annuity
In this type of scheme, the pension beings right away. As soon as you deposit a lump-sum amount, your pension starts. This is based on the amount the policyholder invests. You can choose from a range of annuity options. In accordance with the Income Tax Act of 1961, the premiums of the immediate annuity plans are tax exempt. Post the death of the policyholder, it is the nominee who is entitled to the money.
e) Guaranteed Period Annuity
Regardless of whether the holder survives the duration, this annuity option is given for periods like 5 years to 10, 15 or 20 years.
f) Pension Plans with and without cover
Pension plans with cover include life cover which means that at the death of the policyholder, the family members are paid a lump sum amount. This amount may not be a very large amount. The without cover plan as the name suggests, does not have life cover. If the policyholder passes away, the nominee gets the corpus. At present, the immediate annuity plans are without cover, while the deferred plans are with cover.
g) Annuity certain
In this scheme, the annuitant is paid the annuity for a certain number of years. This period can be picked by the annuitant and in case of their death, the beneficiary receives the annuity.
h) Life Annuity
The life annuity scheme pays the annuity amount to the annuitant until the time of death. If the annuitant dies and they had chosen the option “with spouse”, the spouse receives the pension amount.
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