Annuity in NPS

What is an Annuity in NPS?

Under the National Pension System (NPS), an annuity allows you to convert a portion of your retirement corpus into a stable post-retirement income. The annuity in NPS ensures regular payouts, even when your salary stops. Upon reaching the age of 60, it is mandatory to allocate a minimum of 40% of your NPS corpus toward purchasing an annuity plan from a PFRDA-authorized Annuity Service Provider (ASP). This rule ensures that a portion of your savings will be protected and generate steady income for the future.

The remaining 60% of your corpus can be withdrawn tax-free, providing you the flexibility to use it for immediate expenses, investments, or any unforeseen needs.

Let’s Simplify With an Example:

Suppose your total NPS corpus at retirement is ₹1 crore. Here's how it would work:

Now, depending on the annuity plan you choose, your ₹40 lakhs can fetch you a monthly or yearly pension. You can even pick options like:

• With Return of Purchase Price – Your nominee gets the principal after your death
• Without Return – You get higher payouts, but no return to heirs
• Spouse Joint Annuity – Continues payouts to your spouse after your demise

How to Buy an Annuity in NPS?

Here’s a step-by-step guide to help you through the process of purchasing an annuity under NPS:

Step 1 – Exit NPS: First, you must initiate an official exit from the National Pension Scheme by closing your pension account. Once this is done, you're eligible to begin the annuity purchase process based on the applicable guidelines.

Step 2 – Select Exit Type: Depending on the type of exit, consider allocating a portion of your accumulated corpus towards annuitisation by converting it into a regular annuity income.

Step 3 – Choose Insurer: Next, choose a life insurance provider that’s authorised by PFRDA to offer NPS annuity services. IRDAI licenses these providers and is responsible for handling annuity payouts.

Step 4 – Invest in Annuity Plans: Post-exit, invest the required portion of your NPS corpus into the annuity plan of your choice. The annuity amount is based on prevailing rates at the time of purchase and typically remains fixed thereafter. This provides a consistent income that doesn’t fluctuate with market performance.

Step 5 – KYC Compliance: Before finalising your annuity purchase, ensure that your KYC (Know Your Customer) documentation is up to date. This step is essential for processing the annuity and transferring your funds to begin receiving regular payouts.

What are the Features Annuities in NPS?

The features of annuities in NPS are:

• Mandatory Investment: At least 40% of your NPS corpus must be used to buy an annuity.
• Investment Flexibility: You may allocate up to 100% of your corpus toward annuities for potentially higher monthly income.
• Tax Implications: The income derived from the annuity is taxed as per prevailing income tax regulations.
• Annuity Service Providers (ASPs): These plans are offered by PFRDA-authorised providers with multiple plan options.
• Lump Sum Withdrawal: The remaining 60% of your NPS corpus can be withdrawn as a lump sum tax-free.

15 Empanelled ASPs to Provide Annuity in NPS:

Below are the PFRDA-approved Annuity Service Providers authorised to offer annuity plans under NPS:

• TATA AIA Life Insurance Company Ltd.
• Axis Max Life Insurance Co. Ltd.
• Bajaj Life Insurance Company Ltd.
• ICICI Life Insurance Co. Ltd.
• HDFC Life Insurance Co. Ltd.
• Canara HSBC Life Insurance Co. Ltd.
• Aditya Birla Sun Life Insurance Company Ltd.
• IndiaFirst Life Insurance Co. Ltd.
• Kotak Mahindra Life Insurance Co. Ltd.
• LIC Pension Fund Ltd.
• Nippon Life India Asset Management Ltd.
• PNB MetLife India Insurance Company Ltd.
• Shriram Life Insurance Company Ltd.
• Reliance Capital Asset Management Ltd.
• Star Union Dai-ichi Life Insurance Co. Ltd.

Important Factors to be Considered While Selecting an Annuity Service Provider

Here are the following factors that need to be considered while selecting an ASP:

• Annuity Rates: Evaluate the annuity rates offered by different ASPs, as these directly determine the amount of regular income you’ll receive. A higher rate means a larger pension for the same investment corpus.
• Minimum Corpus: Each Annuity Service Provider may have a minimum investment threshold for purchasing its annuity schemes. Ensure your accumulated NPS corpus meets or exceeds this minimum requirement.
• Provider Reliability: Examine the provider’s reputation and track record in making consistent and timely annuity payments. A financially sound and dependable ASP is crucial for long-term income stability.
• Annuity Options: Review the variety of annuity options available, such as lifetime annuity, joint life annuity with spouse benefit, or annuity with return of purchase price. Choose a plan that aligns with your financial goals and needs.
• Customer Support: Consider the quality and responsiveness of the ASP’s customer service. Since this is a long-term engagement involving your retirement income, effective communication is essential.
• Fees and Transparency: Understand all applicable charges and fees related to the annuity plan. Transparency helps ensure there are no hidden deductions affecting your returns. 
• Financial Stability: Assess the financial stability of the insurance company serving as the ASP. A strong financial foundation ensures the continuity of your pension throughout retirement.

Types of Annuity Plans

Here are the main types of annuity plans available through NPS. Each plan comes with specific features designed to meet different retirement needs:

1. Lifetime Income

   Provides annuity payments to you for your lifetime. The annuity stops upon your death.

2. Joint Life with 100% Income to Last Survivor

   Annuity is paid to you for life. After your death, the same annuity continues to your spouse. The annuity ends upon the spouse’s death.

3. Lifetime Income with Return of Purchase Price

   Annuity is paid to you throughout your lifetime. After your death, the purchase price, your original investment, is returned to your nominee or legal heir.

4. Joint Life with 100% Income to Last Survivor and Return of Purchase Price

   This plan offers annuity for your lifetime, followed by your spouse’s. Once both have passed, the original investment is refunded to your nominee.

5. Family Income Plan under NPS

   This structured plan ensures you receive annuity payments first. Upon your death, it goes to your spouse. After the spouse’s death, it is passed on to other eligible family members in the following order:

   • Dependent mother 
   • Dependent father

   Once all eligible members have received the annuity, the purchase price is returned to the surviving children or legal heirs. The annuity amount is determined based on the prevailing rates at the time of purchase and continues using the original investment until the last eligible beneficiary is covered.

Comparison of Annuity Plan Options under NPS

What Happens to NPS at Maturity?

At maturity, meaning upon reaching the age of 60 or under specific premature exit conditions, the fate of your NPS account depends on factors like:

• Age of Retirement: You can extend your NPS account until the age of 70 if needed.
• Withdrawal Options: You can withdraw up to 60% of the corpus tax-free. The remaining 40% must be used to buy an annuity.
• Annuity Choice: The type of annuity plan you choose determines your pension income.
• Market Performance: The value of your NPS account depends on the market performance of your investments.
• Regulatory Guidelines: Any changes in government rules and regulations can impact your NPS account.

As per Section 10(12A), you can withdraw 60% tax-free, while the remaining 40% must be used to purchase an annuity from any PFRDA-authorised Annuity Service Provider. This ensures a steady post-retirement income.

What Are the Prerequisites for NPS Exit?

Before exiting your NPS account, ensure you complete the following:

• Keep your Claim ID ready.
• Verify that your PAN, contact info, bank details, and nominee information are current and FATCA compliant.
• Update details online if necessary via CRA or your Point of Presence (POP).
• Ensure your mobile number and email ID are active, and if using eSign, that your mobile is Aadhaar-linked.

What Are the Different Exit Types Under NPS?

Under the National Pension Scheme (NPS), there are three types of exits:

1. Superannuation Exit:

   • Occurs at the age of 60 or upon superannuation.
   • At least 40% of the accumulated corpus is converted into annuity.
   • The remaining 60% can be withdrawn as a lump sum.
   • For corpus < = ₹ lakhs, 100% withdrawal is an option.

2. Premature Exit:

   • Takes place before reaching 60 or superannuation age.
   • A minimum of 80% must be used to purchase an annuity.
   • A maximum of 20% can be withdrawn as a lump sum.
   • Non-government subscribers can exit NPS after 10 years.
   • For corpus <=₹ 2.5 lakhs, 100% withdrawal is possible.

3. Exit Due to Death:

   • For Government Subscribers:

     • A minimum of 80% of the pension corpus is converted into an annuity for the spouse, the dependent mother, and then the dependent father.
     • The balance is paid as a lump sum to the nominee or legal heir.
     • For corpus <= ₹ 5 lacs, 100% withdrawal is an option.
     • If no family members are alive, the corpus goes to children or legal heirs.

   • For Non-Government Subscribers:

     • The nominee or legal heir can choose annuities offered upon exit.
     • If choosing an annuity, they must select the Annuity Service Provider and plan in the Death Withdrawal Form.

Tax Benefits for NPS Contributions

The Income Tax Act provides specific deductions for contributions made to the National Pension Scheme (NPS). These are covered under Sections 80CCD(1), 80CCD(1B), and 80CCD(2).

1. Section 80CCD(1): Employer’s Own Contribution

   • Eligible individuals: Salaried and Self-employed
   • Deduction limit:
     • Up to 10% of Basic + Dearness Allowance (for salaried individuals)
     • Up to 20% of gross income (for self-employed individuals)
   • Maximum claimable amount: Part of the overall ₹1.5 lakh limit under Section 80CCD(1)
   • Example:
     • Jiya’s annual Basic Salary + DA = ₹15,00,000
     • 10% of ₹15,00,000 = ₹1,50,000
     • Jiya can claim ₹1,50,000 under Section 80CCD(1)
     • This amount is included in the ₹1.5 lakh ceiling, which also covers LIC, PPF, ELSS, etc.
   • Note: If Jiya has already maxed out the ₹1.5 lakh limit with other investments, she can’t claim this NPS deduction unless she reduces those other contributions.

2. Section 80CCD(1B): Additional Deduction

   • Eligible individuals: All NPS subscribers
   • Deduction allowed: Up to ₹50,000
   • Separate from: The ₹1.5 lakh limit under Section 80CCD(1)
   • Example:
     • Jiya uses up the ₹1.5 lakh limit through EPF, LIC, and PPF
     • She contributes an additional ₹50,000 to NPS
     • This extra ₹50,000 qualifies under Section 80CCD(1B)
     • Her total deduction rises to ₹2 lakh, thanks to this extra benefit

3. Section 80CCD(2): Employer’s Contribution

   • Eligible individuals: Salaried employees with NPS contributions from their employer
   • Deduction limit:
     • Up to 10% of salary under the old tax regime
     • Up to 14% under the new tax regime
   • Separate from: The ₹1.5 lakh limit under Section 80CCD(1)
   • Example:
     • Jiya’s Basic Salary + DA = ₹10,00,000
     • Employer contributes ₹1,00,000 (10% of salary) to her NPS
     • Jiya can claim the full ₹1,00,000 as a deduction under Section 80CCD(2).
     • This is in addition to the ₹2 lakh benefit under Sections 80CCD(1) and 80CCD(1B), giving her further tax relief.

Taxability of Monthly Annuity Payouts under the Income Tax Act

While NPS withdrawals enjoy certain exemptions, the monthly income received from the annuity purchased using 40% of the corpus is taxable in the year of receipt. The applicable head of income under which it is taxed depends on the source of annuity contribution:

1. If the annuity is purchased through employer contributions:

    It is taxed under Section 17(1) as part of ‘Salary’ income. This includes all annuity payouts received from an employer-backed NPS account.

2. If the annuity is purchased through self-contributions:
    

   It is taxed under Section 56(2)(i) as ‘Income from Other Sources’.

How Can You Initiate an Online Withdrawal Request?

To initiate an online withdrawal request from the National Pension Scheme (NPS), follow these steps:

Step 1: Visit the NSDL website and log in using your PRAN and password.

Step 2: Go to the ‘Exit from NPS’ section. Subscriber details will be auto-filled.

Step 3: Provide specifics like lump sum withdrawal percentage, annuity percentage, ASP, and the scheme name.

Step 4: Upload scanned copies of KYC documents, PAN, PRAN card/ePRAN, bank proof, etc.

Step 5: Authenticate the request using OTP or eSign. You’ll get OTPs on the registered or Aadhaar-linked mobile.

Step 6: The POP must verify and authorise your request.

Step 7: Once approved by POP, the withdrawal is processed in the CRA system.

Benefits of Annuities in NPS

• Steady Income: You receive regular, usually monthly, payouts that provide a predictable income pattern throughout retirement.
• Guaranteed Security: Annuities ensure a lifelong income, helping protect you from outliving your savings, even during market downturns.
• Risk-Free Income: Eliminates the stress of having to make investments as it locks annuity rate at a fixed value, so you are safe from market fluctuations and investment missteps.
• Spousal Support Options: Enables you to select plans that will extend financial benefits to your spouse in case of your death, stabilising their well-being.
• Improved Financial Management: The regular flow of money through an annuity after retiring makes it much easier to manage and plan finances.
• Elimination of Reinvestment Risk: Stable rates of fixed annuities give you a regular income without having to face the rises and falls of interest, accompanied by your pension.
• Guaranteed Income: Annuities under NPS provide assured lifelong earnings, offering financial confidence during retirement.
• Market Independence: Your payouts are not tied to market performance, which is ideal if you prefer low-risk financial strategies.
• Death Benefit Coverage (Optional): Some plans provide residual benefits to your nominee if you pass away before receiving the full amount.

Wrapping Up

An annuity in NPS is important for ensuring financial security during retirement by converting a portion of your corpus into regular income. By choosing an annuity that aligns with your retirement goals and needs, you can maximize the benefits of your pension strategy and enjoy a stable post-retirement income.