New savings product for retirement: conditions for claiming tax relief
With effect from 2024, the Ministry of Finance proposes to extend tax-efficient retirement savings with a new form - a long-term investment product. It is an alternative to the current 3rd pillar of the pension system (comprising supplementary pension insurance, pension insurance, and supplementary pension savings) and private life insurance.
The amendment to the Income Tax Act is part of the bill amending certain laws in connection with the development of the financial market, responding to the introduction of the ‘long-term investment product’ in form of an investment pension account kept with a financial institution defined by law. Through this account, the taxpayer will be able to purchase various financial products, such as shares, bonds, and units of an investment trust, as a long-term tax-efficient form of retirement savings.
A single maximum limit of CZK 48,000 per year to decrease the taxpayer’s tax base has been proposed. This limit equals the sum total of the existing limits of contributions that the taxpayer can deduct from their tax base: CZK 24,000 per year for pension pillar III and CZK 24,000 per year for private life insurance. The single limit will therefore be used for all contributions to all tax-efficient retirement savings products, including the new proposed long-term investment product. The taxpayer will be able to choose how to apply the entire amount, i.e., only for one product, or a combination of several forms of savings.
Conditions for granting tax relief
At the same time, the proposal extends the condition for granting the tax relief, which is the duration of all retirement products, from the current 60 calendar months to 120 calendar months. The earliest withdrawal of funds in the year of reaching the age of 60 remains unchanged.
If the relevant conditions are met, the new long-term investment product will be exempt from income tax similarly as the existing retirement savings products today.
The exemption of contributions to the employee's retirement savings product paid by the employer remains unchanged: the current aggregate limit of CZK 50,000 for employer contributions shall apply to any tax-efficient products, i.e., including a new product.
If the taxpayer breaches the 120-month/60-year rule, they will have to refund the applied tax relief in the form of an item decreasing the tax base for a maximum of ten previous taxable periods, i.e., similarly as under the current legislation. At the same time, they will lose the right to the exemption of income paid from these products. Employer contributions that were exempt from income tax will have to be additionally taxed as income from employment in the taxpayer's tax return for the year in which the conditions were breached, for the ten immediately preceding taxable periods. This is also the case today.
The amendment is proposed to be effective from 1 January 2024.Contracts on supplementary pension insurance and private life insurance concluded before that date shall be subject to the existing legislation, except for the maximum amounts that can be deducted from the tax base in respect of these products: the new single limit of CZK 48,000 per year shall apply regardless of whether the product is an old-age savings product under the existing or new legislation.