Annuity in NPS
What are Annuity Plans?
Annuity plans are life insurance plans that give you a fixed amount of money regularly for the rest of your life, on retirement. Since the returns are not market-linked, you are covered against risks due to market fluctuations. There are two main types of annuity plans – immediate and deferred.
Immediate annuities offer income immediately on a lump-sum payment. You can choose an immediate annuity plan if you are closer to retirement. You can also opt to get your regular income as early as one month after your investment.
Deferred annuities allow you to invest a lump sum amount of money or make periodic payments over time to save money for retirement. Your regular income will start at a later date selected by you at the time of purchase of the plan. These are suitable if you do not have an immediate financial need and plan to retire later.
What is NPS?
The National Pension System (NPS) is an investment used for retirement savings. It was introduced as a social security initiative by the Government. NPS offers a diversified investment approach where the funds are allocated to various investment options, like equities, corporate bonds, government securities and alternative investment funds. It caters to diverse risk appetites and investment goals.
Contributions made to NPS can be used to claim tax* benefits under Section 80CCD of The Income Tax Act, 1961.
What is Annuity in NPS?
As per NPS rules, investors must use at least 40% of their saved amount to purchase an annuity upon retirement. This annuity plan can be purchased from an insurance company shortlisted by the Pension Fund Regulatory and Development Authority (PFRDA). The amount of annuity received depends on the amount invested, the type of annuity plan chosen and existing interest rates.
Types of Annuity schemes available under NPS
When considering annuity in NPS, it's important to understand the different schemes available. The annuity rate in NPS varies depending on the type of annuity plan chosen. Understanding them helps you decide the most suitable option for your retirement.
Single life annuity (annuity for life)
The Single Life Annuity under NPS, also called Annuity for Life, provides a fixed income for the annuitant's lifetime. This option ensures that the annuity in NPS is paid until death, offering financial security during retirement. Thus, annuity for life is an ideal choice for individuals seeking guaranteed income for life.
Annuity with return of purchase price
The Annuity with Return of Purchase Price ensures that the beneficiary receives the initial investment (purchase price) after the annuitant's death. This option provides the annuitant with lifetime income while safeguarding the invested amount for the nominee. This type of annuity in NPS offers a balance of income security and protection for loved ones.
Annuity with life with return of purchase price on diagnosis of critical illness
The Annuity with Life with Return of Purchase Price on diagnosis of critical illness offers lifetime income to the annuitant. There is a special benefit of returning the purchase price if diagnosed with a critical illness. This annuity in NPS option provides financial stability and peace of mind during a challenging time. All this ensures that the annuitant or their family is protected financially.
Joint life annuity
A Joint Life Annuity under NPS ensures a steady income for two individuals, typically a couple, for life. In this, the annuity in NPS is paid to the surviving partner after one passes away. The annuity rate in NPS for a joint life plan depends on factors such as the ages of both annuitants. This option offers peace of mind. Both individuals are financially protected throughout their lives.
Features of Annuity Plans under NPS
Choice of Annuity Provider
You can choose your annuity plan from a list of insurance providers approved by the PFRDA. This allows you to select a plan that aligns with your needs.
Flexibility in Payout Frequency
You can choose to receive your payouts monthly, quarterly, semi-annually or annually as per your convenience.
Low Cost
Low administrative charges allow you to allocate more money towards your retirement savings
Portability
NPS annuity plans allow users to transfer their saved pension amount easily between annuity providers, without losing any benefits.
Lifetime Income
Annuity plans under NPS offer a regular income for life. This helps you maintain your lifestyle and meet your financial goals during retirement.
Benefits of Buying Annuity in NPS
Regular Income
Annuity in NPS offers a regular income for life during retirement. This helps you meet your day-to-day expenses.
Flexibility
NPS offers flexibility in choosing your annuity provider. Also, you can choose to receive your retirement income as per your requirement – monthly, quarterly or annually.
Low-risk Retirement option
Annuity plans under NPS provide a stable income stream, making it a reliable low-risk choice for retirement.
No Investment Cap
There is no upper limit on contributions to NPS, allowing you to invest freely for retirement.
Tax* Benefits
Investments in NPS are eligible for deductions subject to conditions prescribed under Section 124* of the Income Tax Act, 2025, helping lower taxable income and save for retirement.
Steps to Purchase Annuity from NPS
Below are the steps to purchase an annuity from NPS:
Exit NPS
Close your pension account before purchasing an annuity from NPS
Decide the annuity amount
Convert a portion of the saved amount into an annuity
Select the annuity provider
Choose an Insurance Regulatory and Development Authority of India (IRDAI)-licensed life insurance company shortlisted by the PFRDA
Invest in annuity plans
Invest the chosen portion of your money in the desired annuity plan of the selected insurance company
Ensure KYC compliance
Complete Know Your Customer (KYC) requirements of the annuity provider for an easy transfer of funds
What Are the Different Exit Options Available under NPS?
Below are the different exit options available under NPS:
Superannuation exit
This exit occurs when an individual reaches the age of 60 or on retirement from employment.
Premature exit
A premature exit from NPS can happen before reaching the age of 60 or retirement. In this case, a minimum of 80% of the saved amount should be converted to an annuity, and the other 20% can be withdrawn as a lump sum.
Exit due to death
Exit due to death has different procedures for government and non-government subscribers. For government subscribers, a minimum of 80% of the pension corpus is converted into an annuity for the nominees or legal heir. The balance amount is paid as a lump sum. However, if the corpus is less than or equal to ₹ 5 lakh, the option for 100% withdrawal is available. For non-government subscribers, the nominee or legal heir can choose the annuity service provider and scheme accordingly in the death withdrawal form.
Exit due to Permanent Disability or Critical Illness
For government subscribers, if an employer certifies that a subscriber has been discharged from service due to invalidation or disability, the exit process in the NPS will be treated as retirement or reaching the age of 60 years. Similarly, for non-government subscribers, they must provide a disability certificate from a government doctor. In such instances, the exit procedure from NPS will be same as that of retirement or reaching the age of 60.
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