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A pension plan is a good way to secure your financial stability post-retirement. These pension plans which are maintained by the employers protect you from any uncertainty that may come unannounced post your retirement.

In this article, we cover the following topics:

  1. What are pension plans?
  2. What are the tax implications of pension plans?
  3. What are the different types of pension plans available in India?
  4. How are the various plans classified?
  5. What are the advantages of pension plans?
  6. What are the disadvantages of pension plans?


1. What are 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.


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2. What are the 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. Only 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. What are the different types of pension plans available in India?

There are different kinds of pension plans which you can check below:

  • plans that are sponsored by an insurer where the investment is solely in debt and are best suited for investors who are conservative
  • plans that are unit linked and invest in both equity and debt
  • 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

Pension plans

There is no doubt that pension plans are a much safer form of investment with multiple classifications which are based on the benefits of the plan and its structure.

4. How are the various plans classified?

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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5. What are the advantages of pension plans?

Some of the advantages of investing in Pension Plans are listed below:

a. Option in Investment

Pension funds give investors the option to invest in either the safe government securities or take some risk and invest in debt and equity investments depending on their risk profile. The risk is balanced by the prospect of higher returns that are generated by the investment.

b. Long-term savings

These plans serve as a long-term savings scheme regardless of whether you opt for a lump sum payments or multiple payments of small amounts, the savings is assured. Pension plans create an annuity which can be invested further and give rise to a steady flow of cash post your retirement.

c. Choose how you want to get paid

Depending on what your age or what your plans are, you can either invest a lump sum amount and get annuity payments right away or you may choose a deferred annuity plan which will let your corpus earn more interest until the payouts begin.

d. Works as a life insurance cover

There are pension plans that give the investor the lump sum amount when they retire or in the case of the death of the individual, whichever scenario occurs earlier. This means that your pension policy also serves as a life insurance cover.

e. Negates the effect of Inflation

It is a good way of negating the effects of inflation, by investing in pension plans. These plans pay a lump sum amount during your retirement which amounts to a maximum of ⅓ of the corpus that is accumulated and the remaining ⅔ of the corpus is used in generating a steady cash flow.

f. Access a lump sum amount during an emergency

You may make adjustments to your pension policy to access the lump sum payout in case of an emergency. This can be done to cover one’s long-term health care as well.

6. What are the disadvantages of pension plans?

a. Limited amount of deduction allowed

Though pension plans qualify you to a tax deduction, the maximum allowed deduction on life insurance premiums is INR 1 lakh under the Income Tax Act.

b. Taxation on the annuity

When you receive the annuity after your retirement, it is taxable as on that date.

c. High returns require high-risk taking

To make sure that the payout at the time of your retirement is adequate, you may have to seek high-risk options in order to obtain higher returns. The traditional non-risky investment options may not be enough to override the effects of inflation.

d. Best suited for early investors

If you are not an early investor, this investment option may be a little late for you. As the returns earned by someone who invests at age 21 as opposed to someone aged 30 or 35 years, will get a substantially larger return.


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