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Annuity in NPS

Individuals who subscribe to the NPS must use at least 40% of their accumulated corpus on superannuation to purchase an annuity, which will provide a steady source of income post-retirement. The annuity plan can be purchased from any Annuity Service Provider (ASP), including HDFC Life.
HDFC Life is an IRDAI-licensed and Life Insurance Company transacting annuity business in India and empanelled by the Pension Fund Regulatory and Development Authority (PFRDA) to service the annuity requirements of NPS subscribers. On successful exit from NPS, individuals can invest in annuity plans, considering the features of annuity that influence the investment.

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What is NPS?

National Pension System (NPS) is a pension plan administered and regulated by the Pension Fund Regulatory and Development Authority (PFRDA), a pension fund regulator, created by an act of parliament.

The NPS seeks to inculcate a habit of saving for retirement amongst Indian citizens. It is one of the popular types of retirement plans in India, designed to provide a sustainable solution for ensuring adequate retirement income.

NPS CALCULATOR


What is Annuity in NPS?

An annuity refers to the regular income or monthly payment received from an annuity plan. Under the NPS, annuity provides a regular income to subscribers once they retire. The annuity amount depends on the amount invested, the type of annuity plan chosen, and prevailing interest rates. Using an annuity calculator can help estimate these amounts. Individuals who subscribe to the NPS must use at least 40% of their accumulated corpus to purchase an annuity on superannuation, which will provide a steady source of income post-retirement. The annuity plan can be purchased from an insurance company empanelled by PFRDA, including HDFC Life.


How Do I Purchase Annuity from NPS?

Before purchasing an annuity, the subscriber must first exit the NPS. An exit is defined as closure of the individual pension account of the subscriber under National Pension System. Depending on the type of your exit, you have to annuitize a portion of the accumulated corpus. HDFC Life is an IRDAI-licensed Life Insurance Company transacting annuity business in India and empanelled by PFRDA to service the annuity requirements of NPS subscribers. On successful exit from NPS, individuals can invest in annuity plans. The amount of funds depends on market-linked returns. Additionally, individuals must complete their KYC compliance before getting the annuity plan issued through the funds transferred, ensuring a regular guaranteed income for life.

Annuity Plans

Factors Affecting Annuity Rates in NPS

Annuity rates are the primary benchmark used to calculate your lifelong pension income from the accumulated NPS corpus. These rates are not fixed; they fluctuate based on prevailing economic conditions, the specific annuity plan you select, and the pricing strategy of your chosen insurer. Understanding these variables is essential to predicting your future financial stability.

Interest Rate Conditions
 

Annuity rates are heavily influenced by prevailing interest rates at the time of purchase. Since insurers invest your corpus in long-term fixed-income securities to fund your pension, higher market interest rates generally translate to higher annuity payouts. Conversely, in a low-interest-rate environment, the same corpus will generate less income.

For example, a ₹50 lakh corpus might yield an annual pension of ₹3.5 lakh at a 7% annuity rate, but only ₹3 lakh if the rate drops to 6% due to economic shifts.

Type of Annuity Chosen
 

The annuity option you choose directly affects your payout. Each option varies based on risk and benefits. A Life Annuity (single life) usually offers the highest monthly payout. This is because payments stop after the subscriber’s death.

Options like Joint Life or Annuity with Return of Purchase Price (ROP) offer lower payouts. These include added benefits. For example, payments may continue for a spouse, or the purchase amount may be returned to the nominees. This means you trade a higher immediate pension for better long-term financial security for your family.

Annuity Provider Terms
 

Annuity rates are not uniform across the industry; they differ among the various PFRDA-approved Annuity Service Providers (ASPs). Each provider utilises its own mortality assumptions, administrative cost structures, and investment yields to price their products.

Recent data shows that rates can vary by 50 to 100 basis points between different insurers for the same plan type. Given current market trends, comparing quotes is vital, as even a 0.5% difference in the annuity rate can result in a significant cumulative income difference over a 20-year retirement period.

Age at the Time of Annuity Purchase
 

Your age at the time of purchasing the annuity is a critical determinant of the rate offered. Generally, the older the subscriber, the higher the annuity rate. This is because the insurer’s expected payout period is shorter, allowing for larger periodic instalments.

For instance, a subscriber purchasing an annuity at age 60 might receive a rate of 6.5%, while someone deferring the purchase until age 70 might secure a rate of 8% for the same corpus. Planning the timing of your exit from NPS can therefore significantly optimise your long-term pension income.

Benefits of Annuity in NPS

Annuity in NPS offers retirees the following benefits:
Payment Flexibility when investment in savings plan

Better Money Management

The annuity in NPS provides a regular and steady income for individuals post-retirement, making it easier for individuals to manage their finances and regular expenses.

Consider the Risk when purchasing Savings plan

No Reinvestment Risk

The annuity rate is fixed at inception and is guaranteed for whole life, which eliminates the reinvestment risk.

Charges to check when buying savings plan

No Cap on Investment

The annuity in NPS does not impose any cap on the investment amount. Individuals can invest 100% of the annuitized NPS corpus for higher payouts after retirement.

Features of Annuity in NPS

Before retirement, all subscribers need to understand the following key features of annuities provided under the National Pension System (NPS). These features determine how your post-retirement income will function:

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Annuity Amount Depends on Key Factors

The annuity amount depends on several factors. These include the portion of your NPS corpus used to purchase the plan, prevailing interest rates at the time of purchase, and the type of annuity selected. A higher purchase price or better interest rates lead to increased payouts. Therefore, choosing the right plan for your goals is essential for long-term financial stability after retirement.

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Flexible Payout Frequency

NPS subscribers enjoy the option of deciding how frequently they want to get their annuity payments. You can choose to receive payments monthly, quarterly, half-yearly, or yearly based on your personal needs and financial planning. This flexibility allows retirees to align annuity payments with household expenses, supporting effective cash flow management in retirement, and can be better planned using a retirement calculator.

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Single or Joint Life Annuity Option

The subscribers have the option to select between a single life annuity and a joint life annuity. In a single life annuity, payments are made solely for the subscriber's lifetime. However, in a joint life annuity, upon the death of the subscriber, their spouse gets the annuity amount. This choice provides financial security to their spouse and is thus a popular option among most families.

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Taxable Income

The authorities treat the annuity you receive as normal income and tax it according to all existing Indian income tax rules. The tax burden will be based on a subscriber's income tax bracket at the time of receiving their annuity amount. Therefore, individuals must understand the income tax on pension and evaluate its impact when planning their retirement income to avoid unnecessary financial strain.

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No Tax Deduction on Annuity Purchase

Although investments made during the accumulation phase of NPS are tax-exempt under Section 80C1 and Section 80CCD (1B) of the Income Tax Act, 19611, no such exemptions apply when buying the annuity at the time of exit. Subscribers cannot claim any tax deduction for the fund they use to purchase the annuity, an important fact they must remember while planning their retirement corpus.

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What Happens to NPS at Maturity?


On maturity, individuals can withdraw up to 60% of the accumulated corpus tax-free. They must invest the remaining 40% in an annuity plan to receive a regular income for the rest of their life.

Why Should NPS Subscribers Buy an Annuity Plan?

Why Should I Buy an Annuity Plan ?

At least 40% of the corpus must be used to purchase an annuity that would provide the subscriber with a monthly pension if the corpus on the day the usual exit request is initiated is more than ₹5 lakh. This step ensures a fixed, regular income for life, even after one stops working. 

An annuity helps cover essential living expenses and safeguards against the risk of outliving one’s savings. It offers retirees peace of mind by providing financial security and stability throughout their retirement years. By converting a portion of the NPS savings into lifelong income, the annuity ensures that retirement is financially comfortable and worry-free.

 

What Are the Pre-Requisites for NPS Exit?

The subscriber must ensure the following before initiating an online exit request:
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Claim ID is available for PRAN

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PRAN is FATCA compliant, and the subscriber’s FATCA declaration along with other details such as PAN, address, contact details, bank details, and nomination details are updated in the NPS account. If required, the subscriber can update these details online through the CRA system or by submitting a physical request to a POP.

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The subscriber must submit the withdrawal request using OTP authentication/eSign using Aadhaar. Hence, valid mobile number and email ID of the subscriber should be registered in CRA to receive OTP as part of OTP authentication. Or, for eSign using Aadhaar, subscriber’s mobile number registered with Aadhaar should be valid to receive OTP as part of eSign.

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What Are the Different Exit Types Under NPS?

There are three types of exit under NPS:

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Superannuation Exit

On reaching 60 years or superannuation age, at least 40% of the accumulated corpus is to be converted into annuity. The balance amount of maximum 60% is paid in lump sum to subscriber. In case total accumulated corpus is <= 5 lacs, subscriber can opt for 100% withdrawal.

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Premature Exit

Before reaching 60 years or superannuation age, minimum 80% of the accumulated corpus is to be converted into annuity. The balance amount of maximum 20% is paid in lump sum to subscriber. In case total accumulated corpus is <= 2.5 lacs, subscriber can opt for 100% withdrawal. To understand how your lump sum payout could work for your financial needs, you can use a lumpsum investment calculator to estimate the growth and potential returns. However, non-government subscribers can exit the NPS only after completing 10 years in NPS.

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Exit Due to Death

 

For Government Subscribers
In case of death of subscriber, minimum 80% of accumulated pension corpus is to be converted into annuity in the name of the subscriber’s spouse, if any, and then to dependent mother and then to dependent father of the subscriber. The balance is paid as lump sum to the nominee or legal heir. In case total accumulated corpus is <= 5 lacs, nominee/legal heir can opt for 100% withdrawal. If none of the family members of the deceased subscriber (spouse, if any, mother, and father) are alive, then NPS corpus meant for issue of annuity shall be returned to the surviving children of the subscriber and in absence of children, the legal heirs of the subscriber as applicable.

For Non-Government Subscribers
The nominee/legal heir of the deceased subscriber shall have the option to purchase any of the annuities being offered upon exit, if they so desire, while applying for withdrawal of benefits on account of deceased subscribers’ Permanent Retirement Account. If the nominee/legal heir wishes to opt for annuity (pension), they are required to select the Annuity Service Provider (ASP) and annuity scheme in the Death Withdrawal Form.

NPS and Annuity Plans NPS and Annuity Plans

How Can I Initiate an Online Withdrawal Request?

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Online Withdrawal request can be initiated by the subscriber

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Subscriber will initiate online withdrawal request in CRA system (www.cra-nsdl.com) by logging in with PRAN as User ID & password

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Subscriber will select the “Exit from NPS” Menu option. The registered details of the subscriber, such as PRAN, contact details, bank details, nominee details etc. will be auto-populated. All these details (except nominee details) will be non-editable.

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Subscriber needs to capture details such as lump sum withdrawal percentage, annuity percentage, Annuity Service Provider, annuity scheme, etc

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Subscriber will mandatorily upload the scanned copies of all the relevant documents such as KYC Documents (Identity & Address Proof), copy of PAN and copy of PRAN card/ePRAN, bank proof etc.

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Subscriber is required to submit the request using OTP authentication/eSign. In case of OTP authentication, two distinct One-Time Passwords (OTPs) will be sent on the mobile number and email ID registered in CRA. Whereas in case of eSign, the OTP will be sent on the mobile number registered with Aadhaar.

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Request needs to be verified and authorised in the CRA system by the associated Point of Presence (POP)

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On successful authorisation of the request by the POP, the request will get executed in the CRA system

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More about the National Pension System (NPS)

Annuity in NPS- FAQ's

We’ll tell you everything you need to know about Annuity in NPS

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Is there preferential annuity rate offered to NPS customer vs Non-NPS customer?

Yes, please refer the below comparative table for better understanding
 

Plan

Primary Age

Secondary Age

Corpus*

 NPS Customer Non-NPS Customer
Monthly Annuity Payout Monthly Annuity Rate Monthly Annuity Payout Monthly Annuity Rate
Life Annuity without Return of Premium 60 NA 10,00,000 7,359 8.83% 6,950 8.34%
Life Annuity with Return of Premium 60 NA 10,00,000 5,423 6.51% 4,997 6.00%
Joint Life Annuity without Return of Premium 60 55 10,00,000 6,411 7.69% 6,010 7.21%
Joint Life Annuity with Return of Premium 60 55 10,00,000 5,391 6.47% 4,973 5.97%
 
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Can I purchase an annuity plan with more than 40% of my NPS corpus?

Yes, individuals can purchase an annuity plan with more than 40% of the NPS corpus on superannuation. Using a higher percentage of your NPS corpus for your annuity could lead to higher income payouts and a steady income for the future.

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When I turn 60, can I defer purchasing an NPS annuity plan?

Yes, individuals can defer withdrawing their NPS lump sum and purchasing an annuity on superannuation for up to three years from the day they complete 60.

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How does my monthly contribution affect my annuity?

The amount you put into your NPS earns returns and builds a corpus for your annuity. The monthly contributions you make could help build a larger corpus for higher annuity payouts once you retire.

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How will I receive my annuity?

Your ASP will pay the annuity amount to you directly via a bank transfer.

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

Individuals can choose the active or auto investment option when subscribing to the NPS. Under the active option, you get to choose how your funds gets invested and allocated across the different asset classes. When you select the auto option, the amount gets invested for you in a pre-defined manner based on your age.

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What are the various asset classes in which the funds are invested in NPS?

The asset classes in the NPS are Alternate Asset Class (Asset Class A), Corporate Bonds (Asset Class C), Equity Shares (Asset Class E), and Government Bonds (Asset Class G).

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What is the default NPS annuity scheme?

The default annuity scheme is the NPS Family Income. It covers the subscriber and their spouse, mother, and father.

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What is the period of payment of annuity in NPS?

For single premium and immediate annuity plans, the minimum payable period can be 5, 10, 15, or 20 years. Once this period is over, the subscriber receives the annuity for life.

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Can a subscriber change the annuity plan or annuity service provider later?

No, once you select an annuity plan and ASP, you cannot make any changes. It’s best to evaluate all your options before making a decision.

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Disclaimer

1. As per Income Tax Act, 1961. Tax benefits are subject to changes in tax laws.

2. Amount of guaranteed income will depend upon premiums paid subject to applicable terms and conditions.

3. In the case of Joint Life annuities the payout continues till either of the lives chosen in the policy is alive.

*GST is not applicable on NPS exit proceeds

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