While most private sector employees do not receive pensions, it is important for them to plan for their retirement on their own.

If you're one of the people who do not want to figure out how to make the necessary investments to assure a comfortable retirement income – a pension fund is an option. Moreover, the cherry on top is that investing in such funds provides tax benefits.

The majority of pension plans have two stages:

  1. Accumulation Stage - You will pay the premium to the plan provider at regular intervals during the Accumulation Phase.
  2. Income Stage – Here, you will be able to withdraw one third of your savings, with the remaining funds going toward purchasing an annuity product that will provide you with a steady stream of income for the rest of your life.

Individual payments to certain pension funds issued by a life insurance company can be deducted up to Rs 1,50,000 per year under Section 80CCC of the Income Tax Act of 1961. The deduction under Section 80CCC is limited to the amount allowed under Section 80C.

What is Section 80CCC?

The amount paid on a new policy or payments made toward the renewal or continuation of an existing policy are included in the Section 80CCC deduction. However, as a compulsory criteria for this deduction – the life insurance policy on which the money is being spent must offer a pension or periodic annuity.

What is the tax exemption limit under Section 80CCC?

Section 80CCC is read in connection with Sections 80C and 80CCD(1), the total exemption limit is reduced to Rs 1,50,000 per year.

This means that your 80CCC limit is not Rs 1,50,000 for itself. This limit must be read along with Sections 80C and 80CCD (1). You cannot invest more than Rs 1,50,000 in these three sections: 80C, 80CCD(1), and 80CCC.

For example: You put Rs 1,00,000 into a ULIP plan - Future Generali Big Dreams Plan. You also put Rs 1,00,000 into a pension annuity with the same life insurance company.

Because ULIPs are tax deductible under Section 80C and annuities are tax deductible under Section 80CCC, the total income tax deduction for these two investments is just Rs 1,50,000.

What are the features of Section 80CCC Deduction?

The following are some of the features and conditions of the Section 80CCC deduction:

  • Contributions must have been made towards the life insurance policy with an aim of receiving a pension after retirement.
  • Section 10 (23AAB) requires that the pension be from a specified fund. This includes any life insurance company's annuity plans, as well as any other pension scheme registered and approved by Insurance Regulatory and Development Authority of India (IRDAI).
  • It's important to keep in mind that you can only claim deductions for the year in which you paid for the pension. In other words, if you make a one-time payment, you can only claim tax deductions for that year, not for the whole plan's duration. However, you can claim tax deductions every year if you pay premiums on a regular basis, such as annual payments.
  • The pension you get is taxable income that will be taxed.
  • The surrender value of the policy is taxable at source – if you surrender it.
  • The exemption under Section 80CCC does not apply to a Hindu Undivided Family (HUF).
  • The combined deduction limits under Sections 80CCC, 80C, along with 80CCD (1) cannot go more than Rs 2 lakh (Rs 1,50,000 under Section 80C, and further Rs 50,000 under Section 80CCD (1B) for investments in either the National Pension Scheme or the Atal Pension Yojana).

What is the eligibility for tax deduction under Section 80CCC?

The eligibility criteria for deductions are as follows:

  • If you want to take enjoy the benefits of the Section 80CCC deduction, you should only invest in a pension plan that pays annuities on maturity.
  • To claim the tax deduction, the pension plan purchased from the life insurance company must be approved by the Insurance Regulatory and Development Authority of India (IRDAI).
  • Associations, companies, partnerships, sole proprietorships, Hindu Undivided Families (HUFs), or any other taxpayer – cannot receive 80CCC deductions because they are not categorized as “individual taxpayers”.
  • Both residents and non-residents individuals are subject to these provisions.
  • The Section 80CCC tax deduction must be claimed each year while filing the Income Tax Returns. This deduction is only available for the Financial Year (FY) in which the payment for investment are done.
  • The deduction amount to be claimed cannot exceed the individual's total taxable income.
  • The policy's funds should be paid out according to Section 10 (23AAB) from the accumulated funds.
  • There are no deductions available under Section 80CCC if bonuses are received or interest are accrued (collected).
  • Any money derived as a monthly pension from the policy is subject to taxes according to the prevailing tax rates.
  • If the policy is surrendered, the amount paid out by the company will be taxed as well.
  • Section 88 does not allow any rebates on investments in annuity plans made before April 1, 2006.
  • Section 80C does not allow for a deduction for money deposited before April 1, 2006.

What is the tax treatment of the annuity pension plan pay-out?

You will essentially be making regular payments towards your pension plan. This money will be accumulated over a period of time. When you reach maturity, the accumulated (collected) corpus will be given to you. Furthermore, only this corpus will be used to pay the annuity.

The money you receive as an annuity is taxable as per the income tax laws. The applicable tax rate will be determined by the income tax slab you fall into, as defined by the Income Tax Act.

Suggested Read: Income Tax Slabs for AY 2022-23.

What is Section 10 (23AAB)?

The provisions of Section 10 (23AAB) are inherently linked with Section 80CCC. It relates to the income earned from a fund that has been set up by a recognized insurer, including the LIC.

The fund must have been set up before August 1996 as a pension scheme. The contributions made by the taxpayer to the policy must have been with the intention of earning pension income in the future.

What is the difference between Section 80C and 80CCC?

Section 80C and Section 80CCC have two major differences:

The first, and most crucial one, is that, under Section 80C, the claimed deduction amount can come from part of income that is non-taxable. However, under Section 80CCC of the Income Tax Act, it is compulsory that the payment paid towards the pension fund must be from the taxable income in order to claim the tax benefits.

The second notable difference between Section 80C and Section 80CCC is that the Section 80C includes a variety of tax deduction investments and expenses. Whereas, the Section 80CCC is exclusively applicable to pension fund or annuity contributions.

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Thus, if you invest in a pension or annuity plan, which are by their very nature long-term and have severe lock-in periods, Section 80CCC allows you to claim a huge tax rebate.

What are you waiting for? Connect with a trusted financial advisors NOW and find out good pension or annuity options for you!