What are the Tax Benefits of the Annuity Plan?

An annuity plan is the most sought after pension plan for those planning to invest for their retirement. Buying an annuity plan assures regular income after retirement with added tax benefits. Let’s delve into the tax benefits that Annuity plans have to offer.

With the ever-growing inflation, investing in annuity plans has become necessary to have a financially stable post-retirement life. Even though you have built a significant corpus in your saving account, you may require an annuity plan to fall upon for your contingent needs after retirement.

Depending upon the nature of payment you opt for, there are two types of annuity plans that you can choose.

Immediate Annuity Plan: The payouts for these plans are given immediately after the purchase until a particular time or lifetime. This plan requires a lumpsum payment during the purchase.

Deferred Annuity Plans: Similar to other investment plans, money is invested for a certain period, and after a specific date, the annuity payment starts. These plans are divided into 2 phases the accumulation phase, where the premium is paid towards the accumulation of corpus. After this is the vesting phase, where the beneficiary starts receiving the pension.

Now let’s check the tax benefits on these annuity plans.

People who haven’t actively planned for their retirement benefit from investing in an immediate annuity. To promote retirement planning government has allowed several tax benefits on investing in an immediate annuity plan.

The lumpsum amount paid towards the annuity plan is eligible for tax deductions under Section 80CCC of the Income Tax Act 1961. The maximum deduction allowed under Section 80CCC is 1.5 lakhs during a year.

The annuity plan qualifies for a tax deduction. At the same time, the annuity payments are considered as regular salary and qualify for a tax deduction as per the income tax slab. So any income received up to 5 lakh is tax-free. 

Also, another added benefit is that the taxpayer can claim a standard deduction of Rs. 50,000 or the pension amount, whichever is less. If the primary source of income is only the annuity payments, the annuitant is likely to have zero tax liability.

The deductions allowed for annuity plans are not only for the residents of the country but also for non-residents who apply for the annuity plan. The deduction limit of 1.5 lakh is clubbed with Section 80C and Section 80CCD.

Another retirement plan to secure retirement is the NPS annuity plan, which offers regular payment until a fixed period. 60 per cent can be withdrawn as a lump sum after retirement, while the remaining 40 per cent will be paid out as regular income.

The 60 per cent amount is not taxable, while the rest 40 per cent received as regular income is taxable as per the income tax slab.

Usually, the earnings after retirement are not too high, so it is unlikely that the retirees just receiving the annuity payments would fall into tax brackets. Even if it is taxable, the tax bracket would be very low.