Annuity Explained

An annuity is the part of your NPS savings that turns into a regular pension after you retire. When you exit the National Pension System, you use a portion of your accumulated corpus to buy an annuity from an insurance company. In return, you receive a regular income, often for life.

Understanding how this works helps you plan a retirement income that lasts as long as you do.

What is an Annuity in NPS?

An annuity is a financial product sold by life insurance companies empanelled by PFRDA. You pay a lump sum from your NPS corpus, and the insurer pays you a fixed pension at regular intervals in return.

Think of it as converting your savings into a salary for retirement. Your NPS corpus is the money you have built over the years. The annuity is what turns it into monthly income.

A common misconception is that the whole NPS corpus gets locked into an annuity. It does not. Only a portion is required to buy an annuity, and the rest is yours to withdraw.

How Annuities Function in NPS?

When you exit NPS, a part of your corpus goes towards buying an annuity from a PFRDA-empanelled insurer.

The insurer then pays you a pension, usually monthly, based on the annuity amount, your age, and the annuity type you choose.

How much you need to put into an annuity depends on the type of subscriber and the kind of exit.

Under the PFRDA Amendment Regulations of December 2025, the annuity requirement for non-government subscribers at normal exit has been reduced from 40% to 20% of the corpus.

Government subscribers continue to follow the 60:40 structure, with at least 40% going towards an annuity.

For the complete exit and withdrawal rules, read our detailed guide on NPS withdrawal rules. click here

Types of Annuities Available

PFRDA-empanelled insurers offer several annuity options. The right one depends on your needs and whether you have dependants.

1. Life annuity: Pays a pension for as long as you live. The payments stop after your death, and nothing is returned.

2. Life annuity with return of purchase price: Pays you a pension for life, and your nominee receives the original purchase amount after your death.

3. Joint life annuity: Pays you a pension for life, and continues to your spouse after your death, usually at the same or a reduced rate.

4. Joint life annuity with return of purchase price: Combines both. The pension continues to your spouse, and the purchase price goes to your nominee after both of you pass away.

Options that return the purchase price or cover your spouse give your family more security, but they pay a lower monthly pension than a simple life annuity.

Benefits of Annuities in NPS

1. Guaranteed income for life: An annuity pays you a regular pension irrespective of how long you live or how markets perform.

2. Protection against outliving your savings: With lifespans increasing, a lifelong income reduces the risk of running out of money in old age.

3. Financial security for your family: Joint life and return-of-purchase-price options protect your spouse and nominee.

4. Flexibility in how much you annuitise: The 20% minimum lets you withdraw most of your corpus while still securing a steady income stream.

5. Choice of provider and plan: You can compare annuity plans from different PFRDA-empanelled insurers and choose the one that suits you.

Things to Keep in Mind

Annuity income is taxable as per your income tax slab, so factor this into your retirement planning. Your annuity rate depends on your age and the plan you choose, and once you buy an annuity, the decision cannot be reversed.

Also, subscribers can now stay invested in NPS until age 85, so you are not forced to exit at 60. Staying invested longer gives your corpus more time to grow before you convert it into an annuity.

Plan Your Retirement with PensionBox

Choosing an annuity is a one-time decision that cannot be reversed, so it helps to have someone guide you through it.

PensionBox, backed by Zerodha, helps you through the NPS exit and withdrawal process* and choose an annuity plan that fits your income needs and your family’s security.

It is a dedicated retirement platform that helps you build and manage your NPS corpus with confidence.

1. Open your NPS account digitally. Get your PRAN in just a few minutes, without the paperwork hassle.

2. Track everything in one place. See your balance, contributions, and performance from one simple dashboard.

3. Plan your retirement income. Understand how much corpus you may need and how an annuity fits into your plan.

4. Get expert guidance. Book a free advisory call with a PensionBox expert for clear, personalised advice on your contributions and retirement income. click here

Frequently asked questions

Are annuity payments from NPS taxable?

Yes, annuity payments are taxable as per your income tax slab. It's important to factor this into your retirement planning to understand the net income you will receive.

Can I change my annuity plan after purchasing it?

No, once you purchase an annuity, the decision is irreversible. This is why it is crucial to carefully choose the annuity plan that best fits your needs and those of your family.

What types of annuities can I choose from in NPS?

You can choose from several options such as a life annuity, life annuity with return of purchase price, joint life annuity, and joint life annuity with return of purchase price. Each has different benefits, so select based on your needs and family security.

How long can I stay invested in NPS before buying an annuity?

Subscribers can remain invested in NPS until the age of 85. This allows your corpus more time to grow before converting it into an annuity, providing flexibility in planning your retirement income.