The exemption of Income Tax on annuity after commutation could actually prove to be a game-changer. The other retirement products available in the industry such as fixed deposits or even mutual funds are only taxed for the capital gains. However, an annuity is completely taxed in the hands of the annuitant which makes this product less attractive.
Current rule: Premium payment towards annuities is tax-free upto Rs 1.5 lakhs a year under section 80CCC, which is a subsection of 80C.
At the time of the vesting of a deferred annuity plan, 1/3rd of the entire corpus can be withdrawn tax-free under 10(10A) and the remaining needs to be converted to an annuity as per the choice of the annuitant and the options available. However, the annuity received at the hands of the annuitant is taxable as per his tax slab.
Concern: The concern is that the annuity premium is paid by the policyholder from his post-tax income. Once, he/she starts receiving an annuity, typically after retirement, the entire annuity that he/she opts for is taxable. This makes this product less attractive.
Also, in a life insurance plan, the maturity benefits qualify for a complete tax exemption under section 10(10D) provided the sum assured is at least 10 times the annualised premium. However, in annuity plans, since there is no life insurance coverage, this rule is not applicable.
Expectation: There is an anomaly in the tax treatment for pension plans in India. If this is withdrawn and annuities become tax-free in the hands of the annuitant, even if that tantamounts to the withdrawal of tax benefits for commuted pension, it is still worth the deal.
Also, an NPS investor receives an additional tax benefit of Rs 50,000 under section 80CCD(1b) which is over and above the 1.5 lakh limit of 80C. This benefit should also be extended to annuity plans offered by life insurance companies.
If both the tax expectations from annuity come true, it would change the way India retires and make old age a happier place for all diligent investors!
By, Sanjib Jha, CEO and ED, Coverfox.com