Jeevan Suraksha - Personal pension scheme
Jeevan Suraksha is targeted at self-employed people in particular, and also for employees in small organisations, where the benefit of pension is not available after retirement, Life Insurance Corporation of India’s innovative pension scheme, popularly known as “Jeevan Suraksha,” is the first scheme of its kind, a sort of personal pension plan for all category of individuals, whether they are in service, self-employed, or engaged in any professional pursuits. The special feature of this pension scheme is that the benefit of this scheme can be taken even by persons who are entitled to a pension benefit after their retirement. With increased longevity, a novel person’s retired life is nearly half as long as his active life. And to ensure a pleasant life after retirement, provisions ought to be made when you are young. Jeevan Suraksha is a plan which helps you do so.
The retirement age poses problems, health as well as family problems. The most important problem is financial, hence the pension scheme recently launched by the Life Insurance Corporation of India should act as a financial friend in the years of post-retirement.
Apart from receiving a regular pension in the years following retirement, one very big advantage attached to this scheme is the income tax benefit available for contributions made year after year towards premium payments for the pension scheme. To this end, the Finance (No. 2) Act, 1996, provides for a new special deduction for contribution by an individual taxpayer to a pension fund. This deduction is contained in the newly inserted Section 80CCC of the Income Tax Act, 1961, and the benefit of deduction became available from the Assessment Year 1997-98.
The deduction in respect of contribution to the pension fund of the LIC known as Jeevan Suraksha is @100 per cent of the amount deposited in the pension fund, subject to a maximum sum of Rs 10,000 per annum. It may be recalled that the person entitled to the benefit of this deduction is the individual taxpayer only, whether male or female. The Hindu Undivided Families and other tax entities are not eligible for the deduction. Similarly, the benefit of deduction under the pension fund scheme is only available to a person who makes contribution to the pension fund out of his own income. Thus, if an individual taxpayer were to make investments in the pension scheme in the name of his wife or children, he would not get any tax deduction u/s 80CCC. The aspects of tax benefit in respect of the pension scheme of the LIC are slightly different from the tax benefits that are available u/s 88 of the Income Tax Act in the form of rebate of income tax. While the payments to Pension Scheme under Jeevan Suraksha are eligible to tax deduction @100 per cent subject to a maximum of Rs 10,000, the payments in respect of the normal insurance premium under LIC policies qualify only for a tax rebate of 20 per cent u/s 88 of the Income Tax Act. However, the maximum limit for getting tax rebate for Life Insurance premium together with other specified investment like PPF, PF, etc. is limited to a sum of Rs 60,000 in one year and a maximum tax rebate @20 per cent thereon. The benefits of tax rebate u/s 88 can be claimed by an individual even when he makes payment of LIC premium in the name of his wife or children, but under the new pension scheme of Jeevan Suraksha, the benefit of income tax can be available only to a person who makes a contribution to the pension fund from his own income chargeable under Income Tax Act.
A close look at Section 80CCC reveals that the amount allowed as a deduction for pension fund is only the amount paid or deposited under the pension scheme. It does not include the interest on the pension scheme. Hence the interest or bonus accruing or credited to the A/c of the assessee is not included for the purpose of granting deduction u/s 80CCC. The biggest advantage of this pension scheme is the tax benefit of a 100 per cent deduction from the total income of the assessee, for the amount contributed for this scheme upto a maximum sum of Rs 10,000 in a year.
Thus, if possible, the taxpayer must take advantage of this new pension scheme and contribute to the maximum extent of Rs 10,000. However, for those with a fixed income, who find the regular yearly payment of Rs 10,000 a financial burden, a contribution of Rs 5,000 per year towards the pension scheme is advisable. The scheme is already in operation.
The surrendered amount of receipt under the pension scheme is fully liable to income tax. Similarly, the pension amount received from year to year is also fully liable to income tax. Such amount received becomes the income of the assessee if received by him. In the event of the death of the assessee and the pension amount being received by the nominee or legal heir of the assessee, the liability to taxation accrues in favour of the heir or nominee. One point which would need clarification is the granting of standard deduction on the pension amount received from LIC. A normal salaried employee who receives pension after retirement from his employer, is entitled to a standard deduction on the same. However, in respect of the pension received under LIC’s pension scheme he would not be entitled to a standard deduction u/s 16(1) of the IT Act, 1961. It would be fully taxable. This is because the relationship of employer and employee does not exist, hence any amount received towards pension would be treated as income from other sources and fully liable to income tax. However, the commuted value of pension received would not be liable to income tax. The benefits that can be planned under Jeevan Suraksha are as under:
(i) A personal life long monthly pension with an option to commute 25 per cent of the corpus (notional cash option) totally tax free.
(ii) Alternatively the annuity can be guaranteed for 5, 10 or 15 years to ensure payments for the balance period to your family in case of unfortunate early death.
(iii) Yet another option in the form of joint life and last survivor annuity to ensure 50 per cent pension to the spouse after death of the pensioner.
(i) A provision for the nominee too! The proposal, if accepted without life cover, death benefits on the following scale are payable to the spouse or the nominee.
Duration at death Benefits payable upon death
(a) Death within three policy years Return of premium
(b) Death during 4th to 6th policy years Return of premium with interest at the rate of 8 per cent p.a. from the due dates of premium to the date of death.
(c) Death after 6th policy year Return of premium with interest at the rate of 9 per cent p.a. from the due dates of premium to the date of death.
(i) A policy with life cover guarantees a minimum of 50 per cent of target annuity as family pension, which may go upto 85 per cent depending upon age, duration, etc.
Another feature of the pension scheme is that even in the event of discontinuance of the policy, the premiums paid under the policy are not fully forfeited. If full three-year premiums are paid, benefits of pension are reduced on pro-rata basis. The minimum parameters set up by the LIC for this new pension scheme are as under:
1. Minimum age at entry : 30 years last birthday
2. Maximum age at entry : 60 years last birthday
3. Minimum vesting age : 55 years last birthday
4. Maximum vesting age : 70 years last birthday
5. Minimum Term : 5 years
6. Maximum Term : 35 years
7. Minimum Annuity : Rs 250/- per month
8. Minimum instalment
Premium : Rs 150/- per month, Rs 450/- per
quarter, Rs 900/- per half year,
Rs 1800/- per year.
The pension plan is free and easily available to all individuals within the above mentioned parameters set by the LIC. However, in respect of the life cover the same is not given indiscriminately but only to an insurable person. The following table shows the benefit of pension scheme at the age of 60.
From the above table it is seen, that if the new pension scheme is taken at a young age, the benefits of monthly pension with commutation are substantially high. The best time from the point of view of age group is 30 years and above. For a low monthly or yearly premium, the quantum of monthly pension proposed to be received with or without commutation are really amazing. To opt for the pension scheme with or without life cover is upto the investor. Generally speaking, if an individual already has substantial amount of payments going out for maintaining life insurance policies it would be worthwhile to take advantage of the pension scheme without the life cover. Once the benefit u/s 80CCC has been taken by a taxpayer on his contribution to the pension scheme, the contributions cannot again be taken advantage of while claiming rebate of income tax u/s 88 of the Income Tax Act, 1961. The following Ready Reckoner of Income tax saving can be effected in the case of every individual as a result of contribution in the Pension Scheme of LIC.
From the above chart, it is clear that the higher the income of an individual the more tax he saves as a result of his contribution to Jeevan Suraksha of LIC. Thus, income tax payers with income in excess of Rs 1,50,000 derive maximum tax benefit if they make contribution to this Pension Fund. The individual assessee can make contribution to the Pension Scheme irrespective of his sources of income. The sources of income could be either salary, business, profession, capital gains, house property or other sources. Thus one or more sources of income may be used in making payment towards the pension scheme. Thus, there are substantial advantages of making contribution of the Pension Scheme of Jeevan Suraksha for persons of 30 to 60 years.
The above pension scheme was modified after its launch and some more benefits have been incorporated with effect from October 1, 1996. The changes as per these modifications are as follows—
(a) The minimum age at entry under this plan has been reduced to 25 years from 30 years.
(b) Normal pension payable from the vesting date is now guaranteed for 15 years and payable for life time thereafter.
(c) Pension payable to spouse on the death of purchaser during deferment period, is also guaranteed for 15 years and for life thereafter.
Please watch the latest update from LIC on Jeevan Suraksha for latest on the policy terms.
[Excerpt from: Income Tax Tips for Investors by R.N. Lakhotia & Subhash Lakhotia, Vision Books, New Delhi
Pension plans & Annuities
What is Annuity?
An annuity is an investment that you make, either in a single lump sum or through installments paid over a certain number of years, in return for which you receive back a specific sum every year, every half-year or every month, either for life or for a fixed number of years. After the death of the annuitant, or after the fixed annuity period expires for annuity payments, the invested annuity fund is refunded, perhaps along with a small addition, calculated at that time.
Annuities differ from all the other forms of life insurance discussed so far in one fundamental way - an annuity does not provide any life insurance cover but, instead, offers a guaranteed income either for life or a certain period.
Typically annuities are bought to generate income during one’s retired life, which is why they are also called pension plans. Annuity premiums and payments are fixed with reference to the duration of human life. Annuities are an investment, which can offer an income you cannot outlive and provide a solution to one of the biggest financial insecurities of old age; namely, of outliving one’s income.
By buying an annuity or a pension plan the annuitant receives guaranteed income throughout his life. He also receives lump sum benefits for the annuitant’s estate in addition to the payments during the annuitant’s life time. Also tax benefits are available.
Why this plan ?
Annuity income is assured throughout life, but ceases on the death of the annuitant. An individual who after retiring from service has received a large sum from his Provident Funds, should invest the proceeds in a pension plan or annuity fund available in the market since it is the most satisfactory method of providing a safe and secured income for the rest of his life.
How to pay for this?
Annuities are paid for:
Either through a single premium OR
Through installment payments that are annual in most cases
How to receive payments?
There are several options that are used when the proceeds of an annuity are distributed.
The first is a life annuity, which guarantees you a specified amount of income for your life. On death, the annuity payments cease but your investment is refunded to your estate.
Guaranteed Period annuity (Certain and Life)
A guaranteed minimum annuity, on the other hand, not only provides you with a specified income for your lifetime but, in addition guarantees that your estate will receive payments for a certain minimum number of years, say ten years, even if you should die earlier. On the other hand, should you live longer than ten years, you are entitled to receive annuity payments for you lifetime. Obviously, any annuity that firmly guarantees benefits to you or your estate can be purchased by paying higher annuity premiums.
Under Annuity 'Certain, the stipulated annuity is paid for a fixed number of years. The annuity payments come to an end at the end of that period, irrespective of how much longer you may live. However, the selected period remaining annuity installments are paid to the nominees.
The premiums paid into such annuities may be deducted from one’s taxable income at the time of payment. In addition, the interest earned on the annuities is not taxed immediately. This can be quite advantageous, especially to tax payers in higher tax brackets. Nonetheless, the proceeds of the annuity (which will include accumulated interest) will be taxable when they are paid to you or to your estate as annuity payments.Deferred annuities eventually result in present tax savings.
Broadly, there are two types of annuities vis-a-vis when you receive annuity payments: an immediate annuity, and the deferred annuity.
In the first case you start receiving annuity payments as soon as you pay the premium, which is usually in a lump sum.
In the case of a deferred annuity, the payments to the annuitant start after a certain deferment period. Typically, the annuitant pays annuity premiums in instalments during the deferment period.
Generally, you will pay less premium for an annuity that provides future payments because the deferment period allows the insurance company to invest your premiums at a profit, thereby reducing the cost of the annuity to you.
Since annuities are not life insurance policies, we cannot evaluate them as we evaluate other policies. Unlike life insurance policies which cover the risk of the premature death of a family’s breadwinner, annuities should be evaluated just like any other investment option, i.e. on the four-fold criteria of safety, profitability, liquidity and ready availability of your invested capital in case of need, and capital appreciation.
Your capital may be locked up for life. Consider this,
Firstly, during old age there are times when one needs money in a lump sum, whether for hospitalisation, a major surgery, or even for investment in housing, etc. Once locked in these annuity plans, the capital is not available to you should you have any such requirement.
Secondly, these plans also foreclose your option of shifting your investment into newer, more profitable areas, which may emerge from time to time. Even today, alternate investment options yielding higher than 12 percent guaranteed returns are available in mutual funds, company deposits and debentures, etc which also afford the flexibility of retrieving your capital in case of need.
It is strongly advised that you should examine all such options before buying an annuity plan.
(Source :: sify.com)