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Pension Plan: Type of Pension Plans and Their Tax Benefits

dateKnowledge Centre Team dateDecember 17, 2021 views130 Views
Pension Plan | Types of Pension Plan | Tax Benefits of Pension Plans

A pension or retirement plan is a type of investment plan that enables a person to allocate a part of his savings towards his long-term goals. This helps to deal with uncertainties of post-retirement life, through a regular flow of income after retirement.

Pension plans provide you with financial security so that when your professional income starts to ebb, you can still live with pride without compromising on your living standards. Given the high cost of living and rising inflation, retirement planning has become all the more important. Depending upon the goal behind your retirement planning, you can choose between various types of pension plans.

Also Read - Pension Meaning

Different Type of Pension Plans

There are different types of pension plans that you can choose to multiply your savings. Very importantly, before choosing an appropriate type of pension plan, you must first prioritize your financial goals.

Things to Consider while Planning your Retirement | Retirement Planning Tips

According to your long-term financial goal, you can choose one of the types of pension plans given below:

i. Immediate Annuity Plans

a) Single investment plans
b) Annuity income starts immediately after depositing money
c) You can buy for a limited income tenure, for example, 10 years
d) Invest for a lifetime income

ii. Deferred Annuity

a) Single or regular premium options
b) The annuity starts after a few years of the investment
c) Limited and lifetime income options
d) Bonus additions for long-term investors

Click Here to Read - Deferred Annuity

Canara HSBC Life Insurance Company's Guaranteed Income4Life plan offers you a choice to pay regular premiums for a certain period.

iii. Pension Plans with Life Cover

These are the pension plans which also provide a life cover for you. After your demise, the life cover sum assured is available to your spouse or other nominees. Most pension plans from life insurance companies carry a default life cover.

iv. Pension Plans without Life Cover

Pension plans like senior citizen saving scheme and monthly income plans from mutual funds, etc. do not provide a life cover. However, you can use them to create your post-retirement income.


A few ULIPs, like Invest 4G from Canara HSBC Life Insurance, offer lifetime plans. You have the option to use these long-term ULIPs as pension plans with the following features:

a) ULIPs allow partial withdrawals after five years
b) Invest 4G has a systematic withdrawal option to give you a regular sum automatically
c) Bonus additions for long-term investors
d) Start early build your corpus with equity funds, and draw tax-free pension after retirement from the same plan

Tax Benefits in Pension Plans

Pension plans offer the following tax benefits in India:

1. Benefit Under Section 80C

a) Annual investment amount eligible for deduction up to Rs 1.5 lakhs
b) Additional deduction of up to Rs 50,000 for specified investments

2. Tax-Free Growth

a) Accrued interest in the pension plans is free from taxation
b) Withdrawals of interest before maturity will also be free from tax for plans like Invest 4G.

3. Tax-Exemption of Maturity Proceeds

Maturity proceeds from a life insurance pension plan would be tax-exempt if investment conditions have been met.

Know more about - Is Pension Taxable?

Tax-Free Pension from Invest 4G

Century option of Invest 4G gives you the freedom to build your corpus and draw a tax-free pension from it. Here’s how:

1. Start investing up to Rs 2.5 lakhs every year at the age of 30

2. Make sure your life cover of the policy is always 10 times your annual investment

3. Allocate to equity funds and debt funds, use portfolio strategies to automatically manage the folio

4. Stop investing at the age of 60 and apply for a systematic withdrawal

5. Start drawing tax-free pension

If you are buying the plan on or after 1st Feb 2021, just ensure your total investment into all such ULIPs never exceeds Rs 2.5 lakhs a year.

How to Select a Pension Plan?

While you choose to buy a pension plan, you must be clear about your financial goal. You must go with a pension plan that is appropriate for your particular goal. Here are the different goals for which you need a suitable type of pension plan:

i. Regular Income after Retirement

Regular income post-retirement means you need a safe investment option, which can:

a) Guarantee a long-term income stream
b) Life cover or income continuity for the spouse after your death

Guaranteed Income4Life and Smart Future Income from Canara HSBC Life Insurance Company are two such plans. You can invest up to 10 years before you need the income to start.

ii. Wealth Maximization Goal

If building a huge retirement corpus before you retire is your goal you need something which:

a. Allows you to invest aggressively
b. Has active portfolio management options
c. Offers long-term (possibly lifetime) holding option

Invest 4G from Canara HSBC Life Insurance Company is one such plan. The plan also offers bonus additions for long-term investors.

iii. Legacy goal

Most lifetime pension plans would help you leave a legacy. However, lifetime pension plans such as Invest 4G, Guaranteed Income4Life, etc. can help you leave a specific amount after your death.

Click here to Use - Retirement Calculator

How to Buy the Best Pension Plan?

Here are the factors that you must consider while buying a pension plan:

1. Investment Portfolio

Depending on your age and time before retirement, you can select an aggressive or safe mode of growing your money. Thus, the plan has to offer the best of what you need.

For example, Invest 4G offers diversified equity funds as well as debt funds as investment mediums.

2. Portfolio Management & Systematic Withdrawal

If you are looking to invest aggressively, portfolio management will become an important feature for you. Even if not investing aggressively, you do not want to be involved in managing the withdrawals from the plan. Thus, the systematic withdrawal feature is also important.

3. Maximum Maturity Age

The preferred maturity age would be 100 or life with a pension plan. However, you can choose a plan as per the income period you are looking for.

4. Bonus Additions

Bonuses offer additional growth to your retirement corpus. Thus, if bonuses are available for staying invested for long period, it helps improve your corpus and income.

5. Tax Benefits

The pension plan investment should be eligible for an 80C deduction. While the maturity benefits should be exempt from tax. Usually, both benefits are only available with life insurance pension plans.

You can also use the Century Option of Invest 4G to create a tax-free pension.

Thus, select the right pension plans and enjoy your retirement period with prosperity.

Also Read - What is Family Pension

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