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Are Insurance Retirement Plans Taxable?

Tax efficiency can play an important role when you choose a retirement plan. Do you know how insurance retirement plans are taxed?

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Amit Sethi
December 6, 2023
Tax Returns

Tax Returns

After retiring you can’t afford to take risks or spend more money than what you had originally planned. Tax efficiency is often one of the crucial factors that impact the decisions related to retirement planning. If your retirement plans are taxable or not, you may end up paying a huge portion of your investment income towards paying the taxes.

When it comes to regular income during retirement, you may find several pension or annuity products offered by insurance companies that may or may not be tax-efficient. So, let’s understand how insurance retirement plans are taxable or not and the things you need to be aware of when choosing them as a pension instrument.

Various Insurance Retirement Plans And How They Are Taxed?

Insurance retirement plans are offered in two variants, Immediate Annuity and Deferred Annuity. In the immediate annuity, the income starts flowing from the start of the investment. The income received from immediate annuity till your principal amount is returned, is exempt from taxes. However, the income you receive later on is considered as interest income and it is taxed according to your applicable income tax slab rate. Immediate annuity can be a good option if you want to allocate the lump sum amount received from the National Pension System (NPS) or the Employees’ Provident Fund (EPF) maturity. After retirement your salary income stops, therefore your taxable income also comes down, so the tax liability on an immediate annuity is normally not a big issue for the investors.

In a deferred annuity, the investor first pays the premium regularly under the ‘accumulation phase’ and continues till the next phase called the ‘income phase’ begins. Under the income phase, the investor gets the option to partially withdraw the eligible lump sum amount and the remaining amount from the accumulated corpus is used to purchase the annuity which flows in regularly for the relevant tenure. In deferred annuity, the premiums deposited with the insurance company are eligible for the tax deduction under Sec 80C. However, the annuity is taxed according to the slab rate applicable to the investor.

How To Plan Your Retirement Income?

When planning your retirement income, you must not rely solely on the insurance retirement plan. Return offered by insurance retirement plans may not be very attractive as a substantial portion of the premium is adjusted to mortality risk cover. You may consider the appropriate insurance plan for retirement but also diversify the retirement portfolio to other avenues such as bank fixed deposits (FDs) with monthly income plan (MIP) option, Senior Citizens Savings Scheme (SCSS), Pradhan Mantri Vaya Vandana Yojana (PMVVY), Post Office Monthly Income Scheme (POMIS), etc. A diversified retirement portfolio can help you earn a higher return and provide greater liquidity at the same time.

The author is an independent financial journalist.

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