Pension Schemes That Help Tax Saving in India
The Income Tax Act provides investors several benefits to save tax liabilities. Individuals may choose from different financial products to save taxes.
One such option is pension plans, which are available for the individuals. Most investors include these plans in their overall investment portfolio to enjoy the dual benefits of wealth creation and tax savings.
Here are the three tax saving pension plans
1. Insurance
Insurance plans include endowment, money back, and term policies. Insurers also offer pension plans, which are often overlooked by a majority of investors. These pension plans offered by insurance companies are beneficial for retirement planning and the premium is eligible for tax rebate under section 80CCC of the Income Tax Act.
Insurers allow the investors to withdraw some portion of the accumulated corpus on maturity, which is also tax-free. Some benefits of including pension plans offered by insurance companies include:
- Plan financial goals, such as children education, marriage, purchase a home
- Offer financial security to the beneficiaries in case of an unfortunate incident
- Tax benefits under section 80CCC of the Income Tax Act
2. Public Provident Fund (PPF)
PPF is a government-sponsored retirement and saving plan available for individual investors. This option is advantageous for individuals who lack another structured pension plan.
A minimum amount of INR 500 must be invested in this account for a period of 15 years. The maximum eligible annual investment under this plan is INR 1.5 lacs. The government announces the annual interest rate and is often related to the debt markets.
Investors must keep the amount invested for at least 15 years and can extend the account in 5-year intervals. The entire maturity amount is also tax-free because PPF is an exempt-exempt-exempt (EEE) scheme. Partial withdrawals are allowed from the 7th financial year. Tax benefits for PPF are available u/s 80C of the Income Tax Act.
3. National Pension System (NPS)
NPS is a defined contribution pension plan regulated by the Pension Funds Regulatory and Development Authority (PFRDA). Individuals aged between 18 and 60 years are eligible to invest in the scheme and take advantage of the NPS tax benefits.
The NPS is one of the most cost-effective plans due to the lower management fees. Investors must invest at least INR 6,000 in the Tier I account, which is the mandatory account with limitations on withdrawals. Tier II account is optional and has no withdrawal restrictions.
Investors enjoy NPS tax benefits of up to INR 2 lacs. Subscribers enjoy tax deductions of up to INR 1.5 lacs under section 80 CCD (1) and INR 50,000 under section 80 CCD (1B) of the Income Tax Act. Returns on investment in NPS are earned through investing in different asset classes, which include government securities, corporate bonds, and equities.
The NPS is flexible because each subscriber is provided with a unique Permanent Retirement Account Number (PRAN) making it completely portable. Applicants may check their PRAN status through the PFRDA site.
Different insurers offer a large variety of pension plans. Investors can use an online pension calculator to determine the potential returns they may earn on these different plans before making their choice.
Financial security after retirement is important to ensure individuals are able to sustain their standard of living. To determine the amount that would be required post-retirement and the sum that must be currently invested, it is advised use a pension calculator.
In addition to ensuring financial stability, investing in pension plans provides tax savings for the investors and including these in the investment portfolio is highly advisable.
