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priya Shah made post

I have been reading up on pension plans. Can you tell me how they are taxed?

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Suresh Patil answered.
2 years ago

This is a very pertinent question as pension plans are taxed in a completely different manner as compared to the traditional insurance plans and unit-linked insurance plans (ULIPs).

We need to bear three different situations in mind to understand the way pension plans are taxed in India.

Situation #1 Death of the policyholder The proceeds received by the family members upon death of the policy holder is completely tax free under section 10(10D).

Situation #2 Surrendering the policy before maturity Surrendering the pension plan before maturity has serious tax implications. First of all, the premiums that you have claimed as part of deduction under Section 80C will be reversed and you will have to pay tax on it. Secondly, the entire surrendered value will be added to your income and you will have to pay tax on it, according to your tax slab.

This is why experts advise against surrendering your pension plan before it matures.

It must be noted that according to the latest rules of Insurance Regulatory and Development Authority of India (IRDAI), 2/3rd of the surrender value received should be used to purchase annuity plan.

Situation #3 Upon maturity The maturity proceeds under pension plans are tax free up to 1/3rd of the amount. Rest 2/3rd of the maturity amount needs to be used to purchase annuity plans as specified by IRDA.