It's tax planning season and, expectedly, investors are gearing up to load themselves with life insurance policies. Tax benefits under Section 88 are undeniably an alluring feature for most insurance seekers.
However pension plans from insurance companies often get the cold shoulder. And here's the clincher -- pension plans apart from playing a significant role in retirement planning, also offer tax benefits under a dedicated section i.e. Section 80CCC.
Various tax sections come into play while dealing with insurance and pension policies; let us consider two such sections in a nutshell.
Tax rebates under Section 88
Tax rebates have the effect of reducing the assessee's tax liability. A rebate can be claimed for premiums paid towards a life insurance policy on which the assessee has paid the premium. This excludes premiums paid towards pension plans of insurance companies.
Tax rebate slabs
| Gross Total Income (Rs) | Rebate Available | Upper Limit (Rs) |
| upto 150,000 | 20% | 20,000 |
| 150,001-500,000 | 15% | 15,000 |
| 500,001 and above | Nil | Nil |
| Individual whose taxable salary is not less than 90% of his gross total income and the salary income before allowing deductions under Section 16 does not exceed Rs 100,000 |
30% | 20,000 |
Deductions under Section 80CCC
A deduction reduces an assessee's taxable income. In the case of contributions made towards pension plans, premiums paid for the same are eligible for deduction. Maximum deduction allowed under a retirement plan with any insurance company is Rs 10,000.
Boost tax savings through pension
| Age (Yrs) | 30 |
| Term (Yrs) | 25 |
| Sum Assured | Rs 500,000 |
| Annual premium | Rs 15,800 |
| Corpus at end of term | Rs 790,000 |
| Rate of return assumed | 5% |
| Deduction under Section 80CCC (Rs) | 10,000 |
An illustrative example will give a clearer picture. Suppose an individual, 30 years of age, decides to buy a retirement plan from an insurance company. He wants a sum assured of Rs 500,000 and the term is 25 years. The premium would work out to be in the range of Rs 15,500-16,000. A deduction of Rs 10,000 under Section 80CCC can be claimed on the premium paid. Assuming that returns are delivered at the rate of approximately 5 per cent per annum, the accumulated corpus at the end of the term would be Rs 790,000.
Most insurance companies give the individual an option to withdraw a part (25-33 per cent) of this sum as a lump sum on maturity. The amount withdrawn or the cash component as it is called, is tax-free.
Another advantage, which Section 80CCC offers is that it is exclusive to Pension Plans only. Therefore, retirement plans can co-exist with other insurance plans like term plan and endowment plan. The latter attract tax rebates under Section 88, while pension plans offer a tax benefit on income under Section 80CCC. Often individuals take an endowment/term plan purely for tax benefit (under Section 88) and ignore the possibility of enhancing their tax-savings by taking a pension plan.
Another noteworthy point for individuals earning an income above Rs 500,000 is that no tax rebate (under Section 88) can be claimed. So it's all the more advantageous to invest in a retirement plan and thereby, claim the Section 80CCC deduction.
By and large, therefore, it is advisable to include a retirement plan in your financial portfolio. This is true for all individuals irrespective of their financial status at the time of entering the plan. Retirement planning has a three-fold benefit:
It would help an individual cope with times, when income levels may have fallen and expenses would be on the rise.
Enable tax saving under Section 80CCC.
The cash component (or lump sum) can be used by the policyholder as a liquid asset to meet emergencies.
