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Can Pension Plans Reduce Tax Liability?

Jun 15, 2018 | 2 years ago | Read Time: 3 minutes | By iKnowledge Team

Yes, they can. Pension plans do have the ability to help you save tax!

“Pension plan!” Vishal exclaimed in mock-tone, looking at Atul with a fair degree of incredulity. “You are just 26. What do you need a pension plan for? This is the time for you to put your hair down and enjoy.”

Atul could sense his face going red, but he knew he had taken the right decision. He knew his investment had the potential to reap him a rich haul in his later years, especially at a time when his salary would cease to exist. In fact, he could enjoy the benefits at the end of each and every financial year.

He knew he could get a tax deduction of up to Rs 1.5 lakh every year – an advantage that not many youngsters are aware of.  Use a retirement planning calculator to know how!

Below are some Tax benefits with pension plans:

There are many pension plans that give you tax benefits. That way, you plan for your later years and, at the same time, get an opportunity to save tax. So, read on if you are interested to know some of the pension schemes that can help you retain more money in your pocket:

1. Public Provident Fund (PPF):

A popular retirement instrument for many, a PPF investment can offer you several tax benefits:

  • The returns on a PPF are completely tax-free.
  • The principal amount is tax deductible under Section 80C of the Income Tax Act.
  • The interest is exempt from tax under Section 10 of the Income Tax Act.

You can visit a bank or a post office to start your PPF investment. This fund has a 15-year lock-in period, meaning you cannot withdraw your investment before the specified time period. But if you have to, you’d have to forgo a small part as a penalty.

2. National Savings Certificate (NSC):

Considered to be a safe investment for providing guaranteed returns, NSC investments provide tax benefits as well.

  • The interest earned on NSCs is eligible for tax deduction.
  • An investment of up to Rs 1.5 lakh in NSC can be excused from being taxed.

 3. Post office time deposit (POTD):

In this case, too, you can avail tax benefits up to Rs 1.5 lakh under Section 80C.

However, the tax benefits are only available for the 5-year schemes. POTDs that are below five years don’t have any tax benefits.

4. Senior Citizen Savings Scheme (SCSS):

You can avail up to Rs 1.5 lakh tax deduction here too. Widely touted as the safest retirement scheme, the SCSS is for those over 60 years of age. This government-backed plan minimises the tax outgo of retirees.

5. Equity Linked Savings Scheme (ELSS):

A type of mutual fund, ELSS offers you the twin benefits of seeing your invested money grow and tax benefits. Like with all pension schemes, ELSS also has a tax deduction limit of Rs 1.5 lakh.

There is a 3-year lock-in period for this tax saving scheme. The limit for tax deduction is Rs 1.5 lakh under Section 80C of Income Tax Act.

6. Bank deposits:

You can also save tax by investing in tax-saving fixed deposits. You can claim deductions up to Rs 1.5 lakh under Section 80C of the income tax act. If you are a senior citizen you are eligible for slightly higher interest rates on FDs.

Therefore, Atul had hit the bull’s eye by investing in pension schemes. Not only was he financially fortifying his retirement years, but he was also taking advantage of the tax benefits provided by pension schemes.

Advt. no.: IA/May 2018/4054


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