In this article, Saloni Sharma discusses Annuity taxes in India.

Introduction

Employees all over the world wish to plan their retirement in order to have a secure and safe future for their families. One such way of ensuring a steady stream of income is through Annuity which is sold by different life insurance companies in India. Annuity contract means a contract under which the issuer agrees to make payments for a period of time determined in whole or in part by reference to the life expectancy of one or more individuals. An annuity is a contract between you and the insurance company wherein you pay either a lump sum amount of money or in a series of transactions to obtain a regular payment for life either immediately or after some time. The money can also be obtained either throughout life or for some limited amount of time.

How does Annuity work?

An annuity is an insurance product and is generally used as a retirement plan by people in our country. The investor invests money as an annuity under a contract with the insurance company, the company further invests the money and pays back the returns generated by it to the investor. The investor can either make a lump sum payment or a series of payments to the company and the money so generated can either be obtained immediately after the investment (monthly, quarterly, annually or as a lump sum payment) or after a few specified years.

An annuity is also a good investment to turn a substantial lump sum into steady cash flow for the future (for example- a winning a lottery, cash prize or otherwise).

The payout of the annuity is determined by various factors like the age of the investor, the time period for investment, the payout time etc.

The individual is also often given an option to obtain the payout either lifelong or for just a few years say for example for a period of 10 years.

Rule no. 89 of the Income-tax rules states ‘For the purpose of providing annuities for the beneficiaries, the trustees shall-

• enter into a scheme of insurance with the Life Insurance Corporation established under the Life Insurance Corporation Act, 1956 (31 of 1956) [or any other insurer as defined in clause (28BB)
  of Section 2 of the Income-tax Act, 1961], or

• accumulate the contributions in respect of each beneficiary and purchase an annuity from the said Life Insurance Corporation of India [or any other insurer] at the time of the retirement or death of each employee or on his becoming incapacitated prior to retirement’.

Types of Annuity

Annuity can be of various types and may be modified according to the requirement of the investor and is classified broadly into two categories on the basis of the time he/she wishes to receive the returns.

• Immediate Annuity

The Annuity where the investor begins to receive the returns on his money immediately without any accumulation and vesting phase. This type of Annuity is ideal for a person approaching retirement soon since he begins to receive a fixed amount of money regularly.

• Deferred Annuity

The annuity where the returns are provided after the accumulation period i.e. after a certain date. These are mostly pension plans under which annuity starts only after a certain time.

This can further be divided into two phases-

• Accumulation Phase- the phase where the individual starts collecting and investing the money, it commences from the day the first investment/premium is made.
• Vesting phase- this phase commences from the day the individual starts receiving the returns or pension.

Deferred annuity is most commonly available in India in the form of pension plans by various insurance companies containing the two above-mentioned phases i.e. the accumulation phase and the vesting phase. Investors under these plans pay a premium to the company periodically until the day of their retirement (accumulation phase) and start receiving the returns soon after their retirement as soon as the vesting period starts till the time of their death.

Benefits of an annuity plan

1. Provision for a fixed income post retirement – The concept of annuity or pension plan helps the customer to get fixed amount of money every month after retirement in the form of returns on the money they deposited for the annuity plan.
2. Works as an Insurance– Certain plans also cover the provisions for health/life insurance otherwise you can opt to receive the returns anytime pre-retirement in case of an emergency. A customer must compare the various plans available to him/her while opting for a plan.
3. Tax benefits may be provided under certain plans– The individual under certain plans can also save a certain amount of taxes depending on the plan under the provision of Section 80C of the Income-Tax Act, 1961.
4. Monetary help in times of need– Many annuity plans where a lump sum payment is made (towards) for a plan the investor is also given an option to obtain lump sum returns which can be obtained anytime even before the completion of the accumulation time and before the vesting time.

Disadvantages of the Annuity plan

1. Higher returns need higher risks– An investor who wishes to gain higher returns after retirement through annuity may not be satisfied with the regular non-risky options available to him because of which he may have to opt for more risk-taking options of investments available to him.
2. Taxes on the returns- The investor in the accumulation period may not have to pay taxes but the returns received in the vesting period may be taxed.
3. More beneficial for early investors- Since the amount of returns received depend on the investing period, the investors who participate early in the plan of annuity, for example, a 26 year old investor as compared to a 35 year old investor earning the same amount of money per annum, will receive more amount of returns at the end of his accumulation period.
4. Only a marginal amount of tax is saved on the purchase of an annuity.

Various options available under the Annuity plan

There are various options with respect to the returns received investments, investment period (accumulation period), extra benefits attached to the plan etc. apart from the deferred and immediate annuity.

Some of the broad options provided to the investors are listed below:

• ‘With or Without cover’ Annuity

A cover basically means a life cover under which the family of the investor is paid lump sum amount of money in the event of his/her death. On the other hand, in case of an annuity without cover, the amount accumulated till the date of death of the investor is given to the family upon his death.

• Life annuity

Returns as pension are paid to the investor till his death. The spouse of the investor may also be paid the pension after the investor’s death if the option is so chosen.

• Guaranteed period annuity

The returns or pension is given to the investor even after his death.

• Annuity certain

Under this, the investor receives the amount for a specifically mentioned period of time. In case of death of the investor his/her beneficiary receives the sum till the mentioned time of the annuity expires.

• National Pension Scheme (NPS)

National Pension System (NPS) is a pension cum investment scheme launched by Government of India to provide old age security to Citizens of India and is regulated by Pension Fund Regulatory and Development Authority (PFRDA). National Pension System Trust (NPST) established by PFRDA is the registered owner of all assets under NPS.

SBI life- Annuity plus, HDFC New Immediate Annuity plan, ICICI Pru Immediate Annuity, LIC Jeevan Akshay, Reliance Immediate Annuity plan are some of the most popular annuity plans in India.

Provisions related to annuity taxes in India

Section 15 of the Income-tax Act 1961 mentions about the incomes that are chargeable for income-tax as ‘salary’, defined in Section 17.

• Sub-clause (ii), clause 1 of Section 17 of the Income-Tax Act 1961 considers annuity and pension to be a form of salary. Income-tax chargeable from these salaries are calculated with respect to Section 16 of the Act which states that a sum of money equal to one fifth of the individual’s salary or five thousand rupees whichever is less, is to be deducted ‘in respect of any allowance in the nature of an entertainment allowance specifically granted by an employer to the assessee who is in receipt of a salary from the government’, and a deduction of the amount of money paid by the assessee on account of tax on employment to the State or to any one municipality, district board, local board or other local authority in the State by way of taxes on professions, trades, callings, and employments shall not exceed two hundred and fifty rupees per annum.
• Under Clause C of Section 80 of the Income-Tax Act, 1961 which contains ‘deductions in respect of certain payments’ includes

• Sum paid under the contract for a deferred annuity for an individual, on the life of self, spouse or any child
• Sum deducted from the salary payable to Govt. Servant for securing deferred annuity for self, spouse or child for a payment limited up to 20% of his salary
• Contribution to notified annuity Plan of LIC (e.g. Jeevan Dhara) or Units of UTI/notified Mutual Fund. However, If in respect of such contribution, a deduction under Section 80CCC has been availed then rebate under Section 88 would not be allowable.

• Under Section 80CCC, ‘deduction in respect of contribution to certain pension funds’ it is mentioned that Deduction in the computation of his total income of up to a maximum of ₹1,50,000 may be available upon payment of premia for annuity plan of LIC or any other insurer but the premium must be deposited to keep in force a contract for an annuity plan of the LIC or any other insurer for receiving pension from the fund.

• Under National Pension Scheme (as mentioned above) any individual who is a subscriber of NPS can claim the tax deduction up to 10% of gross income under Section 80CCD (1) of the Income-Tax Act, 1961 within the overall ceiling of ₹1.5 lac under Section 80CCE. An additional deduction for investment up to ₹50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subSection 80CCD (1B). This is over and above the deduction of ₹1.5 lakh available under Section 80C of The Income-Tax Act. 1961.

• For a corporate subscriber, National Pension Scheme additional tax benefit is available under Section 80CCD(2) of the Income-Tax Act, 1961. Employer’s NPS contribution (for the benefit of the employee) up to 10% of salary (Basic + Dearness allowances), is deductible from taxable income, without any monetary limit.

• For Corporates, employer’s Contribution towards NPS up to 10% of salary (Basic + Dearness Allowances) can be deducted as ‘Business Expense’ from their Profit & Loss Account.

Conclusion

Overall, investments in Annuity are a good way to secure and plan your future financially especially for post-retirement income. A buyer has a lot of options to choose from, with respect to insurance companies and various plans offered by them in order to purchase an annuity. With the option of enrolling in The National Pension Scheme, any employee can opt for obtaining pension benefits by just creating an account, the link for the same is provided here. Although various insurance companies provide different benefits, one must keep a few aspects in mind before choosing a plan for themselves like the return rates, safety, liquidity, coverage and time period. it is also advised by various experts from time to time, to maintain an emergency corpus and not invest your entire savings in the annuity.