The Income Tax Act, 1961 allows individuals to claim deductions and exemptions on their gross income. These deductions and exemptions help individuals to reduce their taxable income which, in turn, reduces their tax liability. Thus, taxpayers try and avail as many deductions and exemptions possible to reduce their taxable income by the maximum possible limit.
When talking about deductions, Chapter VI A of the Income Tax Act, 1961 is quite popular. This chapter lists the different sections under which you can claim deductions from your taxable income. The deductions are allowed for eligible investments that you do and expenses that you incur in a financial year. One such section under Chapter VI A is Section 80CCC which allows you a deduction for investing in a life insurance pension plan.
Section 80CCC of the Income Tax Act, 1961, has a lot of aspects and contains conditions which you should fulfil to be eligible to claim a deduction. So, let’s understand Section 80CCC deduction in details
What is Section 80CCC?
Section 80CCC is a Section of the Income Tax Act, 1961 which allows deduction on the amount invested towards a life insurance pension policy. If you buy or renew a life insurance pension plan, which would pay annuities after maturity, you would be able to claim deduction on the premium paid towards the plan under Section 80CCC.
Eligibility requirements for claiming deduction under Section 80CCC
The deduction under Section 80CCC is allowed only to those taxpayers who fulfil the eligibility conditions prescribed under the section. These conditions include the following
- The deduction is available only to individual taxpayers. Hindu Undivided Families (HUFs), corporates, Body of Individual (BOI), Association of Persons (AOP) or Trusts cannot claim deduction under this section
- The individual taxpayers can be residents or non-residents to claim the deduction
- The investment should be done in a pension plan which pays annuity after maturity
- The pension plan must be offered by an approved insurance company which has been registered with the Insurance Regulatory and Development Authority of India (IRDAI)
Terms and conditions for availing deduction under Section 80CCC
Besides fulfilling the eligibility criteria mentioned above, you should also keep in mind the following terms and conditions when claiming a deduction under Section 80CCC
- The premium paid should be either for buying a new pension plan or for renewing an existing pension plan
- The accumulated funds of the pension plan should be paid as per the provisions specified under Section 10 (23AAB)
- If the pension plan earns any bonus or interest and the same is distributed to the taxpayer along with annuity payments, the bonus or interest would not be allowed as a deduction. Such bonus or interest would be taxable in the hands of the taxpayer
- The pension paid by the pension plan would be considered as a taxable income in the hands of the taxpayer
- If the taxpayer surrenders the pension plan, the surrender value received would be taxable in the hands of the policyholder
- Rebates which were offered on investments done in annuity plans before April 2006 under Section 88 would not be allowed anymore
- If the taxpayer deposits any amount before April 2006 into a pension plan, such deposited amount would not be eligible for deduction under Section 80CCC
Section 10 (23AAB)
As mentioned above, to claim deduction under Section 80CCC, the pension plan should pay its funds in a manner specified under Section 10 (23AAB). Thus, it becomes important to understand what this section is all about and how it is linked with Section 80CCC.
As per the Income Tax Act, 1961, Section 10 allows exemption from incomes. Section 10 is divided into many sub-sections and clauses and Section 10 (23AAB) is one such division. Section 10 (23AAB) allows exemption on income earned by a fund which has been established by a recognized insurance company, including LIC. The income of the fund would be exempt if the fund is established as a pension scheme before August 1996 and any contribution made to the fund by a taxpayer is done with the intent to receive annuities. Moreover, the fund should be approved by the Controller of Insurance or by the Insurance Regulatory and Development Authority of India (IRDAI) which has been set up under Section 3(1) of the Insurance Regulatory and Development Authority Act, 1999.
Thus, while Section 10 (23AAB) allows the fund to claim an exemption on its incomes, Section 80CCC allows deduction on the contribution done by a taxpayer to such fund. Thereafter, when the accumulated fund, along with the interest earned, is paid to the taxpayer in the form of pension, the pension would be taxed in the taxpayer’s hands.
Things to remember about Section 80CCC deduction
While Section 80CCC allows you deduction to lower your tax liability, here are a few things which you should remember before claiming the deduction
- Deduction under the section is allowed for up to INR 1.5 lakhs. Moreover, the section is read along with Sections 80C and 80 CCD (1) which means that the maximum deduction under all three Sections cannot exceed INR 1.5 lakhs. So, for instance, if you invest INR 1 lakh in a 5-year fixed deposit scheme or an ELSS scheme (eligible under Section 80C) and INR 1 lakh into a pension plan (eligible under Section 80CCC), you would be eligible for a total deduction of INR 1.5 lakhs only. The remaining INR 50,000 would form a part of your taxable income
- The insurance company from which you buy a pension plan can be a public sector company or a private sector company as long as the insurance company is registered with IRDA
- The deduction would be allowed for the premium paid for the financial year whose tax liability is being calculated. Even if you pay an advance premium for two or more years, the deduction would be allowed only on the premium for the previous year whose tax liability you are computing. For instance, in the financial year 2019-20, you pay a premium of INR 60,000 which includes INR 20,000 for the year 2019-20 and INR 40,000 for the next two financial years. In this case, you can claim a deduction only on INR 20,000 and not on INR 60,000. Similarly, if you buy a single premium pension plan, the deduction would be allowed only for one year when the premium is paid. Over the next years, when you enjoy coverage, no deduction would be allowed. Regular premiums plans, however, would give you annual deductions as you pay annual premiums for the policy
- The contribution to a pension plan should be done from your taxable income. Income earned from an undisclosed source would not be allowed as a deduction if invested in a pension plan
Section 80CCC of the Income Tax Act, 1961 allows you two benefits. One, you can reduce your taxable income and save taxes. Two, you can create a retirement corpus by investing in a life insurance pension plan. The plan would help you build up a retirement corpus over your working life so that when you retire, the pension payments would create a source of income for meeting your lifestyle expenses. So, invest in a pension plan and plan your retirement. The plan is a tax-saving investment avenue which would not only build up a retirement corpus, it would also give you tax benefits.
Yes, the premium paid to buy the immediate annuity policy would be allowed as a deduction under Section 80CCC. However, the maximum deduction would be limited to INR 1.5 lakhs which would also include deductions under Section 80C and Section 80 CCD (1).
The premium paid to buy the plan is allowed as a deduction under Section 80CCC up to INR 1.5 lakhs. If you withdraw the policy and avail a surrender value, the surrender value would be taxable in your hands. Similarly, the amount of pension or annuity paid by the policy after retirement would also be considered as a taxable income in your hands and taxed at your slab rates. However, if you buy a deferred pension plan and commute 1/3rd part of the corpus on the maturity of the policy, the commuted amount of pension would be allowed as a tax-free income under Section 10 (10A) of the Income Tax Act, 1961.
Yes, you can claim deductions under Section 80C as well as Section 80CCC but the maximum deduction available would be limited to INR 1.5 lakhs.
When you revive a lapsed policy, the deduction would be allowed only on the premium amount of the financial year in which the policy is revived. Premiums of the last financial years, which are outstanding, would not be allowed as a deduction.
If you are the policyholder of the policy bought on your wife’s life, you would be allowed to claim deduction under Section 80CCC as you are the one paying the premium.
Yes, there are two main differences between Section 80C and Section 80CCC. Firstly, the eligible deductions under both sections are different. While you can claim deduction under Section 80C on investing in any type of life insurance policy, Section 80CCC deduction is available only for investing in life insurance pension plans. Secondly, investments under Section 80C avenues can be made from an income which is not chargeable to tax while for Section 80CCC, the investment should be made from an income which is chargeable to tax.