Types of pension plans and their tax benefits

Before you purchase a Pension Plan, it’s essential you know how they work, tax on pension as well as the other benefits they offer.

Types of pension plans and their tax benefits

After retirement, everyone needs a continuous flow of money to maintain their lifestyle. There are many private and public insurance companies that offer different types of pension plans in India to take care of post-retirement expenses. It is important to understand the implication of income tax on pension plans and various other benefits they offer. In this article, we will look at pension plans in detail.

What are pension plans?

Also known as Annuity Plans, these plans are designed to offer regular income to people after retirement. Pension plans allow the policyholder to choose the date (also known as the vesting date) from which they can start receiving the pension. This date need not be after retirement and can be much earlier.

Related: Is 50 too late for me to start saving for retirement?

There are various types of pension plan in India offered by insurance companies. Let’s look at them in detail.

1. Immediate Annuity:

In an Immediate Annuity plan, the individual has to make a one-time investment in a lump sum and they receive a regular payout called ‘pension’ for the rest of their lives. In case of death of the person occurs, the nominee is going to keep bonus amounts in addition to the amount on maturity. In most cases, the pension can start with immediate effect. The frequency of the pay-out can be monthly, yearly, quarterly and semi-annually.

Immediate annuity plans are ideal for those who want to ensure they receive regular income even after they retire.  The biggest drawback of an immediate annuity is that you cannot withdraw the investment amount or cancel the annuity.

The returns on an immediate annuity can vary. For example, you can choose to get a higher return up to certain years, say 10 years after retirement. Thereafter, you will still get an annuity, but at a lower rate.

Related: 4 things to know about senior citizen travel insurance plans

2. Deferred Annuity:

A deferred annuity is a type of annuity contract that defers or delays payments of income until the investor chooses to receive them. In a deferred annuity, there are two main phases- the Savings or Accumulation phase and the Income phase.

In the Accumulation Phase, the policyholder pays a premium at regular intervals for a specific number of years.

At the end of this phase, the Income phase begins, wherein 1/3rd of the money accumulated can be withdrawn, while the remainder is used to buy an annuity product, which generates regular income for the rest of the policy holder’s life.

There are two types of Deferred Annuity plans:

 a. Traditional Retirement Plan:

In these plans, the investment is mostly made in debt instruments such as government securities. The low risk associated with such financial products makes these plans an attractive option for risk-averse investors. 

Related: Tax Benefits after Retirement

b. Unit-Linked Pension Plans:

These are designed for those who want to plan their retirement early. These plans offer a higher chance of returns than traditional retirement plans. Under unit-linked pension plans, investors can choose to allocate their investment in different asset classes, such as equities, debt, etc.

Pension plans tax exemptions and benefits:

Pension plans provide certain tax benefits of pension plan available in India, depending on the type of plan chosen

Depending on the pension plan one chooses, you get to have a fixed income after retirement or immediately which gives a financial independence.

Section 80CCC: This section of the Income Tax Act was introduced by the government to encourage people to invest in pensions. Under this section, any contributions towards pension funds can be deducted from the gross income, leading to tax savings. As of 2015, the maximum deduction allowed for investment in pension funds is Rs. 1.5 lacs per annum.

Tax benefits on Withdrawal: At the time of withdrawal, you can withdraw up to 1/3rd of your accumulated pension funds without paying any tax on pension.

What is a defined benefit plan?

It is a retirement plan where you are aware of your pension amount of the retirement benefit beforehand. In defined pension plan, the pension amount is the total of your salary history and the number of years into service, this helps you plan your budget accordingly for the future.

What is a defined contribution plan?

In a defined contribution plan, the pension amount is not known beforehand. Here, the pension amount depends on your contribution, this contribution is a fixed amount by you. You can either choose for equities or you can opt of debt funds or go with both.

Related: Insurance for Senior Citizens- Is it worth it?


When planning for retirement, the most important step is to start early. To provide you with a guide on planning for retirement based on what stage of life you are in, check out Life stages and Investment [Infographic].


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