Tax Exemption On Life Insurance In Retirement Plans You Need To Know

Key Takeaways

• Payments made toward retirement plans qualify for tax deductions under Section 80C of the Income Tax Act, allowing deductions of up to ₹1.5 lakh per annum.

• Regular pension income, including annuity payouts, is taxable as salary income under applicable tax slabs.

• A commuted pension (lump sum withdrawal) is exempt under Section 10(10A).

• In the event of the policyholder’s death, the life insurance payout received by beneficiaries is completely tax-exempt under Section 10 (10D).

• Under Section 194P, senior citizens aged 75 years and above may be exempt from filing income tax returns, simplifying taxation on retirement plans.

You may be thinking about buying a life insurance plan as it can offer good protection for the future. While doing that, you should also know that retirement plans offer a good payout option to take care of your retirement. These retirement plans also include life insurance, and one way to compare them with the other options is to look into how they are going to be taxed. Know more about the life insurance tax implications on retirement plans.

Retirement plans are financial policies that enable you to plan for the future,  when you no longer have a steady income. There are two types of plans:

Pension Plans: These investment plans allow you to save money over the years so that you can enjoy a steady income once you retire. Most importantly, a pension plan in India allows you to deal with inflation without compromising on your standard of living.

Annuity Plans: An annuity plan helps you secure your financial future with regular income payments for the rest of your life. With a pension policy, you have something called an accumulation phase. During this time, you put money into the policy periodically. You can use this accumulated funds by purchasing an annuity when you retire.

Upon retiring, your regular income flow dries up, and meeting day-to-day expenses can become a problem. A pension plan ensures that your income flow continues well beyond your retirement. 

Pension plans let you accumulate a corpus of funds through a lump sum investment or premiums that you pay over a set period. Upon retirement, you receive regular payments from your corpus to ensure that the expenses can be met and your future is secure.

What Are The Types Of Retirement Plan Payouts?

As we covered earlier, retirement plans can largely be classified into pension plans and annuity plans. However, they can be further classified. Here are the types of retirement plans in further detail:

Commuted Pension: A pension plan that is paid as a lump sum amount at retirement is called commuted pension. This is paid in one go and can be used for any immediate financial needs right after retirement.

Uncommuted Pension: It is paid in regular installments over a period of time and is called an uncommuted pension. This acts as a regular source of income that can be used for your everyday expenses after retirement.

Immediate Annuity: Immediate annuity plans start providing payouts on a monthly basis right after you purchase the plan. These plans benefit individuals who have just retired and have pension funds to purchase the annuity plan.

Deferred Annuity: A deferred annuity plan, on the other hand, has an accumulation phase first. Individuals can purchase an annuity and put funds into it regularly. You can then select a date to start receiving payouts from the accumulated corpus. 

Retirement plans are designed to help you secure a steady source of income throughout your retirement. These plans enable your savings to grow over time, allowing you to maintain your standard of living despite inflation.

One of the key benefits of retirement plans is the joint-life option, which ensures that if anything happens to you, your spouse will continue to receive regular payments for life. This feature provides peace of mind, enabling you to enjoy your golden years without financial worries.

The power of compounding also has a lot to offer you. Say you begin investing ₹300 per month at the age of 25. Assuming an interest rate of 8%, you'd have over ₹10 lakh by the time you are 65. Now, if you invested the same amount starting at the age of 35, you'd have only ₹4.53 lakh at 65. In this case, starting a decade earlier would more than double your final amount.

Inflation reduces the purchasing power of money as prices rise over time. If you plan to retire in 20 years, you'll need more than double your current expenses to maintain your lifestyle. 

Yes, the income you receive as a pension is taxable in India as any other income. For income tax calculation, a pension is considered similar to your salary income and is taxed on the regular income tax slab. 

However, you can avail of tax benefits on the premiums paid under your pension plan up to ₹1.5 lakh per annum under Section 80C of The Income Tax Act, 1961.

The only type of retirement plan payout exempt from taxation is the one you receive a lump sum under a commuted pension plan. This exemption is applicable under Section 10(10A) of the Income Tax Act.

In cases of all plans, there is a complete tax exemption on life insurance payout received by your beneficiaries in the event of death.

This clause allows for the tax deduction of a life insurance policy's maturity and death benefits, as well as any bonuses that may have been accumulated. There is no upper limit to the Section 10(10D) tax exemption. 

Deductions apply to proceeds on life insurance from both international and Indian life insurance companies. However, the payouts from retirement plans, as well as the payout of a commuted pension plan, are not exempt under Section 10(10A).

Section 194P of The Income Tax Act of 1961 came into effect on April 1st, 2021. It provides conditions under which senior citizens aged 75 years and above are exempted from filing Income Tax Returns (ITR).

For NPS beneficiaries, upto 60% of the accumulated corpus at maturity is tax-exempt. The annuity, with the remainder of 40%, is taxable as income.

1. What is Section 10(10D) and how does it affect tax exemption?

Section 10(10D) allows for the tax deduction of a life insurance policy's maturity and death benefits, as well as any bonuses that may have been accumulated. Deductions apply to proceeds on life insurance from both international and Indian life insurance companies. 

2. Are life insurance proceeds from retirement plans taxable?

The only type of retirement plan payout that is exempt from taxation is the one where you receive a lump sum amount under a commuted pension plan or on payouts received by beneficiaries in the event of death.

3. How do I qualify for tax exemption on life insurance proceeds?

Under Section 10(10D), you can receive a tax exemption on the maturity amount in case of death of the policyholder. You can also receive an exemption on the amount received as a bonus under this section. 

4. What are the tax implications of life insurance at maturity?

The proceeds from uncommuted pension plans, deferred annuity plans, and immediate annuity plans are not exempt and are taxed as regular income. Only the payout under a commuted pension plan is exempted under Section 10(10A) of the Income Tax Act.

5. How does Section 10(10D) affect taxability for death benefits?

All proceeds received by the beneficiaries in the event of the death of the policyholder are exempted from taxation.

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