After toiling hard for 33 years, Ramesh Kumar, 58, is on the cusp of retirement from one of the most reputed engineering firms in the country. Retirement is supposed to be peaceful and comfortable, but Kumar is a worried man. Even though he has substantial savings, he did not actively plan for retirement. He has adequate health cover but needs a regular income to maintain his lifestyle. Has he saved enough for his retirement? Kumar can explore various options, but investing in an annuity plan is likely to be the ideal choice.

What is an Annuity Plan?

An annuity plan is a contract between an individual and an insurance company, whereby the insurer promises to pay an amount at regular intervals (Annuity) to the individual in return for a lump-sum payment or a series of payments known as Premium.

There are two types of annuity plans depending on the nature of payments :

• Deferred annuity plans:These plans are similar to other investment instruments, whereby the money is invested for a specified period of time, and the annuity payments start after a certain date. It has two phases—accumulation phase and vesting phase. In the accumulation phase, the premiums are paid and the corpus is accumulated, while in the vesting phase you start receiving the policy benefits in the form of Annuity.
• Immediate annuity plan:These plans are purchased with a lump sum and the annuity payments start immediately either for a specified period or lifetime. There is no accumulation phase in immediate annuity plans and it starts working from the vesting phase.

Tax Benefits of an Immediate Annuity:

An immediate annuity plan helps you live a secure and stress-free life after retirement. People have the surety in mind that they are entitled to receive payments until they die, even if they drain out the entire purchase value of the annuity insurance plan much earlier. It is especially beneficial for people who did not actively plan for their retirement while they were working. Most plans do not offer to pay the corpus after the death of the annuitant, butsome insurance companies do provide plans which give an option of a life annuity with return of purchase price. The annuitant receives an annuity for his/her lifetime and in case of an unfortunate demise, the purchase price is paid to the nominee and the policy terminates.

To promote retirement planning, the government has allowed several tax benefits on contributing to an immediate annuity plan. Contribution for an annuity plan is eligible for tax deductions under Section 80C , 80CCC, 80CCD of the Income Tax Act, 1961. The specific section of the Income Tax Act allows individuals to claim a tax deduction for contributions made to pension funds. However, the maximum deduction that can be claimed under Section 80C , 80CCC , 80CCD shall not exceed Rs 1.5 Lakhs during a year on costs incurred in buying a new policy or continuing an existing plan that pays pension or a periodical annuity.

The deductions under above specified section are not limited to residents of the country, but can also be claimed by non-resident Indians who contribute towards a pension plan .

Even though the contribution qualifies for a tax deduction, the annuity payments are considered as salary and taxed accordingly. Regular income after retirement decreases gradually and annual income as per applicable tax slabs maybe tax-free. If the primary source of income is the regular annuity payments, you are most likely to have less tax liabilities .basis your taxable income and applicable tax slabs,An additional tax benefit annuity plans is the standard deduction allowed by the government on the gross salary under both old & new tax regime. As annuity payments are taxable under the head ‘Salaries’, the taxpayer can claim a standard deduction of Rs. 50,000 or the actual income, whichever is less.

Conclusion

Even though immediate annuity plans offer several tax benefits, you should not look at annuity plans as a tax-saving instrument. Ideally, you should start retirement planning as early as possible. In case you are not able to save for your retirement, immediate annuity plans may help you ensure a regular income. Immediate annuity plans can also be used to supplement retirement income from other sources.