Annuity in NPS

Having a steady income after retirement and also having enough resources is crucial for financial freedom during the golden years of one's life. To make this a possibility, investing in retirement schemes is highly crucial. NPS or national pension scheme regulated by PFRDA is one such voluntary retirement plan. This plan mandates the subscriber to stay locked in until 60 years of age.

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The subscriber can choose a purchase price and the asset class in which the investment will be put. However, it is not just a simple corpus retirement plan. NPS provides both lump-sums on retirement along with regular annuity income after getting retired. 40 per cent of the corpus goes into an annuity scheme that one will have to buy compulsorily. 

Ideas about annuity in NPS are quite polarizing, as many think of it as an advantage, and others think the opposite. Let's have a look at what annuity schemes are in NPS and how they can serve benefits to retirees. 

About Annuities in NPS

An annuity in NPS is a type of investment that offers regular dividend payments for a stipulated time or life. NPS has included the annuities scheme in its plan to safeguard the financial stability of retirees. From the 100 per cent corpus of NPS, 60 per cent can be withdrawn as a lump sum after retirement. And, the rest 40 per cent, is paid as regular income after retirement to the subscriber and then to the spouse. 

The annuity schemes are provided by the annuity service providers who are impanelled with PFRDA. The subscriber will have to buy annuity plan from the chosen ASP, and 40 per cent of the corpus will be invested in the scheme. The ASP itself will add some money to the returns, and the earnings will be distributed at regular intervals chosen by the subscriber.

There are 11 ASPs as of now who works with PFRDA to provide annuity in NPS:

  • Bajaj Allianz life insurance Co. Ltd. 

  • Canara HSBC oriental bank of commerce life insurance Co. Ltd.

  • HDFC life insurance Co. Ltd.

  • ICICI prudential life insurance Co. Ltd.

  • India first life insurance Co. Ltd.

  • Kotak Mahindra life insurance Co. Ltd.

  • Life insurance corporation of India

  • Max life insurance Co. Ltd.

  • SBI life insurance Co. Ltd.

  • Star union Dai-Chi life insurance Co. Ltd.

  • Tata AIA life insurance Co. Ltd.

Salient Features of Annuities in NPS

When it comes to annuity in NPS, several things make it a point of discussion. Some like the annuity scheme, while others are against it. But, it is crucial to know all the facets of annuities before jumping on the 'annuities in NPS is not attractive.' 

Here are some of the features of annuities that one should know of:

  • The minimum amount from a corpus that needs to be invested is 40 per cent.

  • In case one wants to surrender before reaching the age of 60, they will have to use 80 per cent of the corpus to get the annuity scheme.

  • The annuities are provided by the annuity service providers who are empanelled with PFRDA. 

  • There are five types of annuity plans that one can invest in.

  • Annuity for life for the subscriber.

  • Annuity for the life of the subscriber and then to the spouse after the death of the subscriber. 

  • Annuity for life and purchase price returned after the death of the subscriber. 

  • Annuity for the subscriber's life and the spouse and purchase price returned after the death of the spouse/survivor.

  • Annuity for the subscriber's life, then to the spouse, dependent mother, dependent father, and then the purchase price is returned to the subscriber's child or nominee. 

  • The annuity earnings are taxable, and the corpus lump sum is tax-free. 

Core Benefits of Annuity in NPS

Many people think that it is not helpful or simply a deterrent in getting the entire corpus at retirement when it comes to an annuity. They think that instead of getting the 100 per cent lump sum at retirement, they will get 60 per cent only. And, the rest 40 per cent, will be given out as monthly income, which is not a feasible option. 

However, it is seen that annuity in NPS can be a blessing for many retirees. Let’s see how the annuity scheme in the national pension scheme can help the retirees:

  1. Better Money Management

    Many do not understand the fact that several retirees are not that savvy with handling large sums of money. They tend to be low on financial knowledge and cannot use the corpus for a regular and steady income after retirement. It leads to mishandling of such a large amount. Also, some agents will always make a retiree spend their money in places that are not profitable. 

    It is one of the biggest reasons why NPS has mandated the purchase of an annuity scheme using 40 per cent of corpus. It will provide a sense of stability with its steady monthly income for the rest of its life. The risk of going out of money due to bad investments is now lowered significantly. 

  2. No Reinvestment Risk

    Having a steady income after one retires can be a great thing for many retirees. It can be promised by annuity in NPS. It is because, unlike other short-term schemes, annuities have a steady rate of interest on reinvestment. It means that the reinvestment risk on annuities is eliminated. 

  3. No Cap Investment

    Many retirements and other short-term investment scheme for retirees tend to have a specific investment cap. That is, one cannot invest more than that maximum limit. But, the annuity in NPS does not have such an investment cap. It means one can invest even larger sums of money in annuities for better returns. 

  4. Taxability is Not a Big Issue

    Lastly, one most significant sore point regarding annuity in NPS is its taxability. 60 per cent corpus is not taxable, but the annuity earnings are taxable, making one stay away from NPS altogether. But, if one looks at the bigger picture, one will realize that the tax disadvantage is much smaller than the overall annuity advantage.

    Usually, the post-retirement income of retirees is low, and on top of that annuity, earnings are usually not too high to fall in the tax bracket. Even if the earnings can be taxed, the tax percentage will be significantly low. It means, many retirees may not have to pay the taxes, and even if they have, the tax will not be too high. So, all in all, the taxability of the annuity earnings is not something that should be a deterrent for one to invest in NPS.


  • What are the different investment choices provided to subscribers in NPS?

    A1. For the subscribers of NPS, there are two choices when it comes to investments. As soon as they choose their fund manager, they have to decide on the investment choice. Investment choice can be either active or auto. Auto investment means the funds will be invested automatically in various asset classes in a pre-defined manner, as per the age of the subscriber. In the active investment option, the subscriber can choose how much funds are to be allocated into different asset classes. 
  • What are the various asset classes in which the funds are invested in NPS?

    A2. Under NPS, there are 4 different asset classes in which the funds are invested. Each of these asset classes has a different return and risk value. One can divide the funds as per their risk appetite. 4 of the asset classes are:
    Government securities or asset class G: this is a low-risk asset class with a low return value. Invests in government securities.
    Corporate debt or asset class C: this is a medium-risk asset class with a medium return value. Invests in fixed income instruments.
    Equity or asset class A: this is a high-risk asset class with a high return value. Invests in the share market.
    Alternative investment funds or asset class A: this category of the asset class can have a variable range of risk and return. This class invests in various instruments like REITs, CMBS, AIFs, MBS, etc. 
  • What is NPS’s default annuity scheme?

    A3. Under the default annuity scheme, the subscriber and the subscriber's spouse will be given an annuity for life. They will also get the purchase price as per the contract. In case of the death of the subscriber, the annuity scheme will be reissued to the person mentioned in the contract. After the reissued person and the dependent father/mother of the subscriber are covered, the purchase price is returned to the children or legal heir of the subscriber as per contract.
  • What is the period of payment of annuity in NPS?

    A4. The annuity in NPS is paid in different terms of 5 years, 10 years, 15 years, and 20 years. This is, however, the minimum payable period after this annuity payment is continued till the subscriber is alive. After the death of the subscriber, the purchase price is returned to the person mentioned in the contract. 
  • Can a subscriber change the annuity plan or annuity service provider later?

    A5. No, the subscriber cannot change the annuity scheme or the ASP after subscribing to the NPS. However, the subscriber can make changes during the free look period of the scheme after contacting the ASP.

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
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