Section 80CCC of the Income Tax Act provides individuals with income tax benefits for an annuity plan with a pension fund they may be holding with a life insurer in India.
So in short, if you buy a pension plan from a life insurer that will give you regular payouts (annuities) in regular intervals from your plan, after maturity, you can claim an income tax deduction on your contribution.
Not only just fresh purchases, but you can also claim deduction on the amount paid toward such a plan on renewals.
The income earned by such a fund will not be considered as a part of the total income of the fund which is otherwise taxable under the Income Tax Act. This is mentioned in clause 23AAB of Section 10 of the Income Tax Act for incomes that do not become a part of ‘Total Income’.
What Does Income Tax Deduction Mean?
Income Tax Act 1961 allows all eligible taxpayers in India to invest in various avenues to claim income tax benefits and section 80CCC is just one of the many tax deductions available to us.
Chapter VIA under the Income Tax Act lists all the deductions that are available at the tax payer’s disposal that he or she can use to reduce their tax liability towards the government.
You can claim these deductions under various sections of the income tax act by making a variety of investments. What happens is your taxable income reduces on paper and the ultimate tax outgo to the government reduces. There is certainly a limit to the number of deductions you can claim.
Now that we have a brief idea of what section 80CCC is, let’s understand a few other points regarding this.
Eligibility Criteria To Claim 80CCC Deduction.
Not all eligible taxpayers in the country can claim 80CCC deduction. Only individual taxpayers can claim deductions. Associations, companies, partnerships, sole proprietorships, Hindu undivided families (HUFs) and any other such taxpayer which is not classified as an ‘individual taxpayer’ cannot claim income tax deductions under this section.
You can be a resident or a non-resident but you need to be an individual taxpayer.
If you want to continue to claim income tax deduction under section 80ccc, you need to make sure that you refrain from the below-mentioned points.
You will not be allowed a deduction under Section 80 CCC of the Income Tax Act, if:
- a) you surrender your annuity plan wholly or in parts or any
- b) you receive any pension from such a plan
Any such amounts mentioned in the above two points will be considered as income chargeable for tax and not an 80CCC deduction.
Also, your investment should be done in a pension plan only which pays annuities on maturity.
Your investment should be done in the financial year for you to claim when you’re filing your ITR forms. The deduction can only be made for the financial year in which you have made the payment.
The pension plan you purchase must be from an insurance company that is approved by the Insurance Regulatory and Development Authority of India (IRDAI).
What is the Exemption Limit?
The deduction allowed under section 80ccc of the income tax act is Rs 1.5 lakh but this limit is not privy to section 80 CCC.
Your standalone 80CCC limit is not a total of Rs 1.5 lakh. This limit has to be read along with section 80 C and section 80 CCD (1). Your total investment in these three sections: 80C, 80CCD(1) and 80CCC cannot exceed Rs 1 lakh.
Say you invested Rs 1 lakh in an ELSS mutual fund plan and Rs 1 lakh in a pension annuity plan with an insurer, the total income tax deduction you will get over these two investments is only Rs 1.5 lakh. ELSS is eligible under 80 C and the annuity plan under 80 CCC. So the total deduction allowed will only be 1.5 lakh. Your 80C, 80 CCD(1) and 80CCC limit, all together is Rs 1.5 lakh.
Tax Treatment of Payout
In the pension plan, you will basically be making regular payments towards your plan. Over the years the amount will get accumulated. On maturity, you will have an accumulated corpus. The annuity will be paid out of this corpus only.
The amount you receive as the annuity is taxable as per provisions of the income tax law. The tax rate applicable will be according to the income tax slab you fall under which is also mentioned in the income tax act.
What is Section (10) 23AAB?
Clause 23AAB has nothing to do with you as a taxpayer but it is for the fund. Any income earned by the fund, if registered as a pension scheme, can claim a deduction under Section 10, clause 23AAB. When the fund is accumulated and is paid to the holder of the plan in the form of a pension, this pension is taxed at the holder’s hands and not at the pension level.