Exemption on Pension Funds and Retirement Benefits: Section 10(23AAB) of Income Tax Act

Think about retirement for a moment. You spend decades earning, saving, and planning for a life where money should work quietly for you. The government knows this — and rewards long-term planners through several tax provisions.

Section 10(23AAB) is one of those unsung heroes of the Income Tax Act. It protects the growth of pension funds managed by insurance companies, ensuring that the income they generate remains free from tax.

In short, when an approved insurer runs a pension fund for the purpose of paying pensions later, that fund’s earnings aren’t taxed. It’s a way to make sure your future pension isn’t eaten up by today’s taxes.

What Exactly Does Section 10(23AAB) Say?

This provision allows an income-tax exemption to pension funds set up by life insurance companies under schemes approved by the Central Government.

If such a fund is created only for providing pension or annuity benefits, then:

• The amount invested in the pension fund is not taxable, and
• Any income arising from the pension scheme is fully exempt.

So, the insurer doesn’t pay tax on the fund’s income, & the money inside keeps compounding for policyholders — untouched by the tax department.

Why Was This Introduced?

Before 1990s-era reforms, retirement savings in India were fragmented — a few provident funds here, small pension deposits there. To build a unified, trusted system, the government created a legal space for pension funds maintained by insurers.

Section 10(23AAB) gave them tax freedom so that:

1. People could rely on professionally managed pension schemes, and
2. Insurers could manage these funds efficiently without losing returns to taxation."

Essentially, it was the government’s way of saying — grow these retirement funds first, we won’t tax them yet.

Also Read: The Tax Exemption That Keeps Religious and Charitable Boards Free from Tax Burden

Who Gets the Benefit?

The exemption is claimed by the insurance companies, not directly by individuals. But ultimately, the benefit flows to the investors who buy pension plans.

Here’s the chain:

1. The insurer maintains an approved pension fund.
2. The fund earns interest, dividends, or capital gains.
3. That income is exempt under Section 10(23AAB).
4. Since the insurer pays no tax on it, the savings are passed on to you in the form of higher accumulated value or annuity.

So, while you don’t enter this section on your ITR form, you enjoy its impact every year your pension fund quietly grows.

Main Conditions to Claim Exemption

To qualify under this section, a few conditions must be met:

• The fund must be created by a life insurance company.
• It should exist solely for pension or retirement benefits.
• The Central Government must approve the scheme.
• The income & investments must be used only for pension purposes — not for any other business.

If these boxes are ticked, the entire fund’s earnings remain shielded from tax.

Let’s Simplify with an Example

Suppose Horizon Life Insurance Ltd. launches a retirement product — say, “Golden Future Pension Plan.”

It collects money from lakhs of investors and keeps it in a separate pension fund. Over time, the fund earns interest & capital gains. Because it’s an approved scheme under Section 10(23AAB), any income arising from this pension scheme is exempt.

Horizon Life doesn’t pay tax on those earnings. Result? The fund grows faster. Eventually, the benefit returns to investors as a bigger pension corpus or better annuity rates.

That’s how Section 10(23AAB) quietly strengthens every rupee you save for old age.

Pension Funds Specified Under This Section

Only certain funds get this privilege. These are typically:

• Pension funds run by Life Insurance Corporation of India (LIC).
• Funds managed by other IRDAI-approved life insurers."
• Funds specifically set up for retirement benefits or annuities.

Each fund must be approved by the Central Government to qualify. The control mechanism ensures transparency & prevents misuse of tax exemptions.

Impact on Retirement Planning

Because the amount invested in these pension funds is not taxable, and because the growth is also tax-free, investors get compounding benefits over the long term.

Imagine saving for 25 years. Even a 1–2 % higher post-tax return each year (thanks to this exemption) can lead to a huge difference in your final corpus.

That’s the unseen power of Section 10(23AAB). It protects your retirement fund’s growth silently in the background.

Tax Treatment for Policyholders

While the fund’s income is exempt, your personal tax depends on how you withdraw or receive benefits later:

• Regular pension or annuity: taxable as “Income from Other Sources.”
• Lump-sum withdrawals: partly taxable, depending on scheme rules.

So, the fund enjoys exemption now, & you pay tax later only when you start receiving the money.

Also Read: Guide to Exemption for Business Trusts

Comparison with Other Sections

In short, Section 80C-type provisions give you deduction for what you invest, while Section 10(23AAB) keeps the fund itself tax-free while it grows.

Why This Provision is Crucial for Insurers

For insurers like LIC or HDFC Life, this section is vital because:

• It avoids double taxation — the same income isn’t taxed both at fund & payout level.
• It encourages creation of stable, long-term retirement products.
• It strengthens public trust in regulated pension systems.

Without it, returns from pension funds would shrink, and insurers might struggle to offer competitive annuity rates.

How It Differs from Regular Investment Funds

This distinction shows why the government treats pension funds differently — they serve a social purpose beyond personal gain.

Real-Life Scenario

Let’s take LIC Pension Fund Limited. It manages several approved pension schemes.
The income these funds earn — interest, dividends, or even capital gains — doesn’t attract any income tax under Section 10(23AAB).

That exemption lets LIC credit higher growth to millions of pension accounts. Over the years, this has built confidence among investors that their retirement savings are both secure and tax-efficient.

Broader Economic Impact

When insurers enjoy such exemptions, they can invest more in government securities & long-term infrastructure bonds — assets that support national growth.

So, this isn’t just a tax benefit for savers; it’s also a way to channel stable capital into the economy.

Also Read: The Tax Exemption Rule for Professional Institutions

Quick Checklist for Compliance

For a fund to stay eligible under Section 10(23AAB):

• It must be notified and approved by the Central Government.
• It must file returns in accordance with IRDAI norms.
• Its accounts should clearly show income & utilization solely for pension purposes.
• No part of its income should be used for any other insurance or business activity.

Key Takeaways

• Section 10(23AAB) is an important provision related to pension funds & retirement benefits.
• The amount invested in pension funds is not taxable, and any income from those schemes is exempt.
• It specifies the pension funds eligible for exemption — mainly those managed by IRDAI-approved life insurers.
• The benefit flows indirectly to millions of individuals building their retirement corpus.
• It strengthens both personal retirement security & India’s long-term financial stability.

Final Thought

Tax laws can look complicated on paper, but provisions like Section 10(23AAB) show their human side — protecting people’s life savings from unnecessary taxation. It ensures that the money meant for your old-age comfort continues to grow quietly in the background. The next time you hear about a “pension plan by LIC” or “retirement fund by HDFC Life,” remember that the tax freedom under Section 10(23AAB) is what keeps your pension pot healthy year after year.

If you’re planning your retirement & unsure which pension schemes actually fall under Section 10(23AAB), our tax experts can guide you.
Visit CallMyCA.com — we simplify retirement planning, tax exemptions, and compliance, so your money works smarter even after you stop working.