Is the annuity amount in Jeevan Shanti policy taxable?
LIC’s Jeevan Shanti Policy is a pension plan which pays annuity pay-outs to the annuitant. Jeevan Shanti has two benefit variants. The policyholder can either choose to buy an immediate annuity with the premium or invest in a single premium deferred annuity plan. While in the former option annuity payments would be made immediately after the policy is bought, in the latter option, annuity payments are paid after a deferment period. Moreover, the annuity can be taken on a single life basis or on a joint life basis wherein the annuity continues to be paid to the surviving spouse if the primary annuitant dies early.
Tax treatment of pension plans is different from other life insurance plans and LIC’s Jeevan Shanti policy is no different. The premium paid to buy the policy is allowed as a deduction under Section 80CCC up to a maximum of INR 1.5 lakhs. As regards the annuity payments, they are taxable.
The annuity received under the plan is considered as an income in the hands of the annuitant. As an income, the annuity forms a part of the taxable income and is taxed at the annuitant’s income tax slab rates.
In case of death of the annuitant, the policy benefits can be availed in lump sum, in annuity pay-outs or in monthly instalments by the nominee. The choice of the death benefit would be done by the annuitant himself or herself and once chosen the option cannot be changed by the nominee. If the nominee avails the death benefit in lump sum or in instalments over a period of 5, 10 or 15 years, the death benefit paid would be tax-free in the hands of the nominee. This tax-free benefit would be allowed under Section 10 (10D) of the Income Tax Act. However, if the annuity option is selected by the annuitant for paying the death benefit to the nominee, the death benefit would be considered as a lump sum premium payment for an immediate annuity plan where the nominee would be the annuitant. The annuity rates would be determined based on the age of the nominee. In this case, the annuity payments received by the nominee would be considered as a taxable income in the hands of the nominee. The annuity pay-outs would be added to the nominee’s income and taxed at his income tax slab rate.
Thus, the taxation of annuity pay-outs under pension plans, including LIC’s Jeevan Shanti policy, is different from the taxation of payment of other benefits under a life insurance policy. Though annuities are a benefit paid under a life insurance plan, just like maturity benefit or death benefit, they are taxable in the hands of the annuitant. Its always advisable to get to know the tax implications of pension plans if you are buying a plan for yourself.