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Understanding Annuity, It’s Types Taxation and Calculation

An annuity is a contract that offers a regular payout to the subscriber of the scheme like a pension plan. In India, the most common type of annuity is offered as pension plans. These plan function as an agreement which ensures payouts to the subscribers after retirement. In India, purchasing an annuity is one of the most common ways of financing life after retirement and most of the experts consider it as an insurance tool rather than an investment instrument.

Types of Annuities

There are many different types of annuities available to individuals who want to have a steady flow of income after retirement. Let’s take a look at it.

Lump-Sum Annuity

This is one of the most common types of annuity options available in the market. As the name suggests this annuity plan provides the option of a lump-sum payout.  The lump-sum annuity option is generally optional and is available only for a specific period of time. However, in most of the cases, the subscribers cannot withdraw the entire annuity amount as a lump-sum. For instance, in NPS, it is mandatory to use 40% of the accumulated fund for the purchase of the annuity.

Periodic Annuity

 A periodic annuity is specifically designed to provide payouts to the subscribers at regular intervals.  The payments can be made either monthly or at regular intervals at the end of the 5th, 10th, and 15th year, and so on irrespective of whether all the payment of the premiums has been completed or not.

Immediate Annuity

In an immediate annuity scheme, the subscriber pays the premium as a fixed lump-sum and receives the payment immediately after the payment of the lump-sum amount.

Deferred Annuity

Opposite to immediate annuity in a deferred annuity plan, the subscriber needs to pay the premium for a specific tenure which is called as accumulation phase of the scheme. On completion of the accumulation phase, the accumulated amount is utilized to purchase the annuity which is paid to the subscriber as a regular payout after retirement.

Fixed Annuity

In the fixed annuity plan, the annuity payout of the plan remains constant for the entire tenure. This type of annuity functions similarly as a fixed monthly pension and is best suitable for an individual who wants safe and guaranteed regular income. Under this annuity option, the payouts are fixed; however, the chance of capital gain is extremely low.

Variable Annuity

In a variable annuity, the investment is made in the market linked options with an objective to gain high returns on investment. This means that the investment returns of the main fund and the payout entirely depend on the market performance of the fund. Variable annuity options are best suitable for individuals who have a high-risk appetite. 

Taxation of Annuity

As annuities are specifically designed to provide regular pension income to the individuals after retirement, it is taxable as per different slabs governed by the existing rules of taxation. As per the current changes in the slab rates, the on-going income tax slab applicable to the annuities received by the senior or super senior citizens are:

Income Tax Slab Applicable Tax Rate for Senior Citizen (60 years- 80 years of age) Applicable Tax Rate for Super Senior Citizen (80 years or above)
Up to 3 Lakh Nil Nil
Rs. 3 lakh- Rs. 5 lakh 10% of the amount exceeding Rs. 3 Lakh Nil
Rs.5 Lakh- Rs 10 Lakh Rs. 20,000 + 20% on the total taxable  amount exceeding  Rs. 5 lakh 20% on the total taxable  amount exceeding  Rs. 10 lakh
Above 10 Lakh Rs. 1.2 lakh  + 30% on the total taxable amount exceeding  Rs. 10 lakh Rs. 1 Lakh + 30% on the total taxable  amount exceeding  Rs. 10 lakh

Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer. Tax benefit is subject to changes in tax laws. *Standard T&C Apply

  • The above tax rate includes a surcharge of 15% which applies to the annual income above Rs.1 crore.
  • Additional cess of 2% and secondary and higher education cess of 1% of applicable on the income tax and applicable surcharge.

Annuity Calculator

Based on the prevailing market conditions, the annuities are bought by the retirement fund or other applicable management body. However, keeping the volatility of the market in mind a specialized calculator is required to estimate the annuity.  With the help of an annuity calculator the investors can calculate an estimated amount that they will require as an annuity after retirement. With the help of an annuity calculator, the investors can estimate how much investment they need to make during the accumulation phase so that they achieve the desired accumulated amount at the end of the investment tenure. However, certain factors should be considered while calculating the annuity, these factors are:

Information About Income

This is one of the main parameters for annuity calculation. The savings target of an individual for the present and future should be realistic, thus it is important to show the information about the income source i.e annual income, rate of growth of income, etc. This helps the investors to estimate how much annual income growth they can expect in the coming years and how much investment they can make to create a financial cushion for the future.

Information About Demography

This includes the basic information about the current age of the subscribers and their expected retirement age. This information is used to determine the extent of the accumulated phase of the annuity plan. The more early an individual starts investment, the longer they can stay invested. This helps the subscribers to maximize the benefit with the help of the power of compounding and accumulate the maximum fund for retirement.

Current Savings

This is one of another important aspect to be considered for the annuity calculation. Investors should categorize their savings separately. For example, the retirement savings should be done separately and should not be considered a part of child education, marriage, purchasing home, etc. Moreover, it is also important to keep in mind that, how these savings are done- FD, stocks/bonds, mutual funds, RDs, etc. The most important factor that should be considered here is the overall risk Vs. return perception.  By evaluating the risk appetite and the estimated returns you can calculate the amount that will be required to create a strong retirement corpus.

Expenses

The capability to save not only depends on the earning of an individual but it also depends on the current expense they make. It is understandable that if the expenses of an individual will be low then the savings will be more automatically and visa versa.  Moreover, while using the annuity calculator the investors should also consider the future increase of expenses due to inflation.

Inflation Rate

The inflation rate has a prolonged effect on future retirement savings. Firstly, the expense would tend to go up with time, and secondly, the returns would seem to be less valuable when accustomed for inflation. In general, the higher inflation rate will require the investors to save more to achieve the future target of retirement savings, while the lower rate will have the opposite impact.

Expected Rate of Return

Depending on the type of investment option chosen by an individual, the rate of return can be fixed or variable. Fixed-rate means a constant and guaranteed rate of return will be offered to the investors whereas variable rates mean a market-linked return option where the returns depend on the market performance of the fund.

Read Also: Annuity Meaning

Results of Annuity Calculator

The annuity calculator helps to compute the income from investment in a specific period. By providing the above-mentioned information the investors can calculate the retirement result which includes:

  • Total retirement amount
  • Future value of savings available
  • Additional savings that is required
  • The number of years the investment will generate payment at a specified return.
Disclaimer: Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by an insurer.
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