Types of Annuities

Q: How are annuities taxed?

Annuity plans offer tax* benefits. The premiums paid under the policy can be claimed as deduction up to ₹ 1.5 lakh per annum subject to conditions under Section 80C of The Income Tax Act, 1961.

What are annuities?

Annuities are types of plans where you make a lump sum payment and get a regular income for a certain period of time or for life. This enables you to fulfil your post-retirement dreams and maintain your current lifestyle even after retirement.

What are the different types of annuities?

There are primarily two types of annuities. They are:

Immediate annuity

This is a type of annuity plan that provides you with a guaranteed¹ regular income immediately after you pay the lump sum premium. If you are nearing retirement and above 58 years of age, this plan can be beneficial.

¹ T&Cs Apply

Immediate Annuity Calculator

Deferred annuity

In a deferred annuity plan, your income starts at a later date and you can choose when you want the income to start. If you still have a few years before you retire and are between 45 and 58 years old, this type of annuity may be beneficial for you.

Deferred Annuity Calculator

Annuities can be of the below two types based on the type of income you receive:

Fixed Annuity

This type of annuity does not get affected by market fluctuations, hence your income is a fixed and guaranteed¹ amount. This amount is pre-decided by you at the time of purchase of the policy.

¹ T&Cs Apply

Variable Annuity

In a variable annuity plan, your premiums are invested in instruments, such as mutual funds or equities. Payments from such plans depend on the performance of the fund your money is invested in. If the fund performs well, you will get greater returns and vice versa.

How do different types of annuities work?

You can also customise the annuity plan as per your needs. Below are the various options available in an annuity plan:

Life annuity:
In this option, you receive annuity for life. The frequency of payments is usually pre-decided by you at the time of the purchase of the policy. This provides a stable source of income during retirement.
Joint life annuity:
This is similar to a life annuity. In this option, you receive annuity payments for life. In your absence, your spouse continues to receive annuity payments for life.
Life annuity with return of purchase price:
This provides you annuity payments for life. In case of an unfortunate event, your loved ones will receive the amount you paid at the time of the purchase of the policy.
Annuity payable for a pre-decided term:
This provides you the option to choose the duration for which you would want to receive annuity payments. The period can be 5 years, 10 years, or more. This is decided at the time of purchase of the policy. In case of an unfortunate event during the tenure of the policy, the annuity payments are made to your loved ones.

It is important to evaluate the various options provided by an annuity plan and choose the plan that best suits your retirement needs.

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FAQs

1. How does an annuity plan work?

An annuity plan offers a regular source of income during retirement. You pay your premiums towards the plan during your earning years and get regular income during your retirement. Depending on the type of plan you choose, you can pay small amounts regularly or the entire amount as a lump sum and get regular income throughout your retirement.

2. How are the different types of annuities determined?

The different types of annuities in life insurance are determined based on their features, payout structures, premium methods and more. For instance, immediate annuity plans offer an immediate source of income, while deferred annuity plans offer regular income from a deferred date, as chosen by you.

3. What distinguishes a deferred annuity from an immediate annuity?

A deferred annuity has an accumulation period, where you pay the premium towards your plan. You can then start receiving income from the plan at a later date, as chosen by you at the time of the purchase of the plan.

An immediate annuity plan offers immediate payouts right after buying the plan. There is no accumulation period in this type of annuity. You can pay a lump sum amount to purchase the plan and receive income as early as the month following the date of purchase.

4. What is the best type of annuity product?

There are different types of annuities catering to different requirements and income preferences. The best type of annuity in life insurance is the one that suits your need. For instance, if you are retiring soon and need your income to start immediately, you may consider buying an immediate annuity plan. However, if you have some years before your retirement, you can consider a deferred annuity plan.

5. When should I buy an annuity?

An annuity plan gives you regular income during your retirement. The earlier you buy the plan, the more time your money gets to grow. This helps ensure that you get greater income during your retirement. However, if you are nearing your retirement, you may consider buying an immediate annuity plan and start receiving income immediately.

6. How much do I need to invest in an annuity?

The amount needed to invest in an annuity plan can vary based on your requirements. To begin with, you need to calculate the amount you will need during your retirement. For this, you need to consider factors like your lifestyle expenses, medical costs, amount needed to fulfil your post-retirement goals like traveling, pursing a hobby, and more. You must also factor in inflation in this calculation. Once you know the amount you need during retirement, you can calculate the amount you need to invest in an annuity plan so that you can enjoy a financially independent retirement.

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7. How are annuities taxed?

Annuity plans offer tax^* benefits. The premiums paid under the policy can be claimed as deductions up to ₹ 1.5 lakh per annum subject to conditions under Section 80C of The Income Tax Act, 1961.

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Disclaimer

¹ Annuity will be payable in arrears. The frequency of annuity payments can be monthly, half-yearly, quarterly or annually as chosen by the annuitant at the time of purchasing the annuity. The annuity amount chosen at policy inception is guaranteed for life.

^* Tax benefits are subject to conditions under Section 80C, 115BAC and other provisions of the Income Tax Act, 1961. Goods and Services tax and Cesses, if any will be charged extra as per prevailing rates. Tax laws are subject to amendments made thereto from time to time. Please consult your tax advisor for more details.

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