Annuities in NPS Simplified

An Annuity in the National Pension Scheme (NPS) refers to a fixed amount of money given to a subscriber regularly for their lifetime. This payment ensures a regular income (like monthly, quarterly, yearly, etc.) at a specific rate for a period chosen by the subscriber. Essentially, it allows individuals to give their money to an Annuity Service Provider (ASP) and select an annuity option, securing a consistent income flow post-retirement.

Upon retirement, individuals can withdraw 80% of their total NPS savings as a lump sum. The remaining 20% is invested in an annuity scheme selected by the subscriber. These annuity plans are offered by providers approved by the Pension Fund Regulatory and Development Authority (PFRDA). Subscribers must purchase an annuity plan from their chosen provider, who adds to the returns. The earnings from this investment are then distributed regularly according to intervals chosen by the subscriber.

What are the ASPs regulated by PFRDA to offer Annuity in NPS?

Currently, there are 14 Annuity Service Providers (ASPs) managed by the PFRDA to offer annuities in NPS. These ASPs include:

1. Bajaj Allianz Life Insurance Co. Ltd.
2. Canara HSBC Oriental Bank of Commerce Life Insurance Co. Ltd.
3. HDFC Life Insurance Co. Ltd.
4. India First Life Insurance Co. Ltd.
5. Kotak Mahindra Life Insurance Co. Ltd.
6. Life Insurance Corporation of India
7. Max Life Insurance Co. Ltd.
8. SBI Life Insurance Co. Ltd.
9. Star Union Dai-Chi Life Insurance Co. Ltd.
10. Tata AIA Life Insurance Co. Ltd.
11. ICICI Prudential Life Insurance Co. Ltd.
12. Edelweiss Tokio Life Insurance Company Limited
13. PNB MetLife India Insurance Co. Ltd
14. Shriram Life Insurance Company Limited

Key Highlights of Annuities

Annuities hold a significant importance in NPS, so it's important to understand its basic characteristics.

1. A minimum of 20% of the total savings must be invested in an annuity.

2. If one decides to exit before turning 60 (premature exit), at least 80% of the corpus must be used for the annuity scheme, unless the corpus is ₹5 lakh or less, in which case it can be withdrawn in full.

3. Annuities are offered by specific providers approved by PFRDA (Pension Fund Regulatory and Development Authority).

4. There are five types of annuity plans available for investment:

• Annuity for the subscriber's lifetime.
• Annuity for the subscriber's lifetime, with benefits extended to the spouse after the subscriber's demise.
• Annuity for the subscriber's lifetime, with the purchase price returned after the subscriber's death.
• Annuity for both the subscriber's and spouse's lifetime, with the purchase price returned after their demise.
• Annuity for the subscriber's lifetime, then extended to the spouse, dependent mother, and dependent father, and finally, the purchase price is returned to the subscriber's child or nominee.

5. Annuity earnings are subject to taxation, while the lump sum withdrawal of up to 60% of the corpus is tax-free.

Primary Advantages of Annuity

The advantages of Annuity in NPS might seem confusing to some subscribers. Some believe that choosing an annuity means receiving only 80% of the total savings at retirement, with the remaining 20% will be distributed as monthly income, which might not appear much ideal. Nevertheless, Annuity in NPS surprisingly offers some substantial benefits for retirees.

Exploring how this help the retirees in the NPS can shed light on its advantages:

1. Better financial management: Many retirees may struggle to manage their money without sufficient financial knowledge to sustain regular income after retirement. This can result in inappropriate management of their savings.

Additionally, some agents may guide retirees to invest in unprofitable assets. That's why NPS requires using 40% of the corpus to purchase an annuity plan. This scheme ensures a stable monthly income for the subscriber's lifetime, reducing the risk of running out of money due to improper investments.

Update — NPS exit rules changed in December 2025. The 60% / 40% split described above was the rule up to that point. It is left here on purpose, because a lot of older paperwork and third-party calculators still quote it. Under the PFRDA (Exits and Withdrawals under NPS) Amendment Regulations notified on 16 December 2025, a non-government subscriber (All Citizen and Corporate NPS) taking normal exit can now withdraw up to 80% as a lump sum, with a minimum 20% annuity. By corpus: up to ₹8 lakh — the entire amount can be withdrawn; above ₹8 lakh and up to ₹12 lakh — up to ₹6 lakh as lump sum, with the balance going into an annuity or a Systematic Unit Redemption spread over at least six years; above ₹12 lakh — up to 80% lump sum with a minimum 20% annuity. For premature exit there is no longer any minimum subscription period, and a corpus up to ₹5 lakh can be taken in full. One caution on tax, because it is a separate question from the withdrawal limit: Section 10(12A) exempts 60% of the corpus, and whether the extra 20% of lump sum is tax-free has not been settled — do not plan around it without checking. (Source: PFRDA FAQs on Exits and Withdrawals from NPS, All Citizen Model, updated March 2026.)

2. No risks on reinvestment: A stable income post-retirement is crucial for many retirees. Annuities in the NPS ensure this stability. Unlike short-term plans, annuities offer a consistent interest rate on reinvestment, eliminating any risks associated with reinvesting.

3. No investment limits: Retirement plans and some short-term investment options normally set a maximum limit on how much you can invest. However, the annuity in NPS doesn't have any such limit. That means you can invest even larger amounts in annuities within NPS for potentially better returns without facing any investment cap.

4. Simplified taxability: It is important to understand the tax implications on annuities in NPS. While 60% of the NPS corpus remains untaxed, the earnings from the Annuity Plan are subject to taxation. Yet, considering the broader perspective reveals that the tax disadvantage is relatively minor compared to the overall benefits of the annuity.

Typically, retirees have modest post-retirement incomes, and the annuity earnings often don't reach high tax brackets. Even if taxed, the percentage is quite low. It means that many retirees may not end up paying taxes, and even if they do, the amount would likely be minimal.

Therefore, the tax on annuity earnings shouldn't discourage individuals from investing in the NPS.

5. Market fluctuations: The annuity payment stays the same no matter how interest rates or the market changes.

Things to consider when choosing an ASP

• ASPs offer varying rates for providing annuities.
• Different ASPs have specific minimum corpus requirements to qualify for purchasing annuities.

Please note that the smallest sum needed to purchase an annuity varies based on the specific annuity type you prefer and the objectives you aim to fulfil with it.

Type of Annuity Plans

Here are five different types of annuity plans for investment:

1. Lifetime Income: Provides annuity payments to the subscriber during their lifetime. When the subscriber passes away, the annuity stops.

2. Life & Last Survivor with 100% Income: Offers annuity payments to the subscriber and then to their spouse after the subscriber's demise. When both pass away, the annuity stops.

3. Lifetime Income with Capital Refund: Gives annuity payments to the subscriber and refunds the principal amount to the nominee/legal heir after the subscriber's demise.

4. Life & Last Survivor with 100% Income with Capital Refund: Provides annuity payments to the subscriber, then to the spouse, and returns the principal amount to the nominee after both subscribers pass away.

5. NPS - Family Income: Gives annuity payments to the subscriber, then to the spouse. After the spouse's passing, the annuity is re-issued to family members based on a specific order:

• First to the dependent mother
• Then the dependent father,
• Followed by surviving children or legal heirs.

PS: The purchase price is returned based on the prevailing premium rate at the time of annuity purchase.

Select yourself the right Annuity

1. Select an Annuity Plan and company that offers long-term security and reliability for the future.

2. Upon retirement, you can choose to invest a portion of your savings, ranging from 40% to 100%, in an Annuity. This choice involves balancing your need for immediate cash flow after retirement aiming for a larger pension. Investing more in an Annuity Plan leads to a higher pension payout, helping you with increased regular income.

3. Your choice of scheme should be based on how much your family relies on the pension you receive. As shown in the table above, the pension amount decreases when you opt for either a pension for your spouse after your passing or the return of the principal amount to your nominee. If your spouse and family aren't financially dependent on you, the lifetime income scheme might be more suitable.

4. Apart from this, after your retirement, you'll need to interact with the ASP for at least 20-30 years, submitting life documentation periodically. It includes times when your physical movement might be restricted. It's advisable to select an ASP that offers digital/online support for your documentation needs.