March 10, 2026
6 mins read
This blog explains the concept of annuity in the National Pension Scheme (NPS), highlighting how it provides a guaranteed retirement income. It covers annuity features, types of plans, investment percentages, steps to purchase, and tax implications. Readers learn how to choose the right annuity based on income needs, family considerations, and long-term financial stability, ensuring a secure and predictable retirement.
The National Pension Scheme helps you build funds for your retirement years. A key part of this structure is the annuity in NPS. This term refers to the regular monthly income you receive after you retire.
When your scheme matures, you cannot withdraw all the money at once. As per prevailing NPS exit regulations, at least 40% of the accumulated corpus is generally required to be annuitised at superannuation. This requirement is intended to provide a regular post-retirement income stream.
If you decide to exit the scheme early, the rules are stricter. In this case, you must use 80% of the accumulated corpus for annuity in NPS. This leaves a smaller portion for lump-sum withdrawal.
The key features of the annuity in the NPS include the following:
Periodic income payouts are made according to the terms of the annuity contract.
Periodic income payouts are provided subject to annuity terms and insurer conditions. You receive this money at fixed intervals. It helps you manage daily expenses without stress once your salary stops coming in.
Flexibility with Choices:
Subscribers have the freedom to choose from different types of annuity. You are not tied to one plan. This autonomy enables individuals to tailor their expenses to their financial conditions or their family needs.
Minimum Annuity:
Upon retirement, you are required to apply a minimum of 40% of your total corpus for an annuity. This required lock-in makes sure that a large portion of your savings continues to provide support.
Exemption Limit If the accumulated corpus is below the threshold specified under NPS regulations, full withdrawal may be permitted. You can withdraw the full amount.
The National Pension Scheme benefits you in multiple ways. The annuity in NPS provides you with the following benefits:
A One Time Task
It is a one-time investment, and you need not keep investing multiple times. Upon retirement, you need to invest a minimum of 40% NPS balance towards annuity and start receiving income for the remaining years
Regular Pension
You can sit and relax while the scheme provides you with a regular pension after retirement. It is paid at a regular interval for a stable retirement income
Fixed Annuity
The annuity payment is fixed and not driven by market conditions. It also does not have any change in the interest rates
No Investment Limit
The annuity percentage in NPS is set at a minimum of 40% of the NPS corpus upon retirement. However, there is no cap on the maximum investment.
There are broadly five different types of annuity schemes in NPS, as explained below:
is payable to the subscriber. After the death of the subscriber, the spouse receives an annuity, and after the demise of the spouse, the annuity ceases.
In this type, the annuity is paid to the subscriber. After the subscriber passes away, the annuity ceases to be paid.
The subscriber receives the annuity. After their death, the nominee receives the principal amount.
In this annuity scheme, the subscriber receives the annuity, and after their death, the spouse receives the annuity. After the demise of the spouse, the nominee receives the principal amount.
In the Family Income, the subscriber receives the annuity. After the demise of the subscriber, the spouse receives an annuity, and after the spouse's death, the family member receives the annuity in the following order:
The dependent mother of the subscriber
The dependent father of the subscriber
The legal heir of the subscriber.
Additional Read: What is NPS Lock-in Period
To choose the right annuity plan, the following factors must be considered:
Focus on longevity: you need a plan that supports your entire post-retirement life. Ensure the option covers your basic living costs effectively to maintain financial stability without running out of funds too soon.
Decide your investment amount: While 40% is the minimum requirement, you can use up to 100% for the annuity. A higher allocation here typically results in a better monthly income for you during your retirement.
Consider your dependents: if you have a spouse, look for options that continue payments to them. These plans usually offer slightly lower payouts but ensure family security even after you are gone.
Prioritise ease of access: choose a provider with strong digital services. This helps you manage funds online comfortably and avoids the need for stressful physical branch visits during your later retirement years.
To purchase annuity in NPS, here are the steps you need to follow:
After reaching the age of 60/retirement, you need to exit the national pension scheme
Carefully choose an annuity plan of your preference
If you have NPS balance above ₹2.5 lakhs, you need to invest a minimum of 40% NPS balance in an annuity plan
Exit the NPS to invest the 40% balance in annuity. You may invest any amount between 40-100%.
Annuity in NPS is also subject to certain tax implications. Here are the tax implications that you need to understand:
Section 80CCD(5)
Under Section 80CCD(5) of the Income Tax Act of 1961, the annuity purchase after retirement is exempted from taxation.
Section 80CCD(3)
Under Section 80CCD(3) of the Income Tax Act of 1961, the income from an annuity is taxable as per the tax slab of the individual.
The lump-sum withdrawal from the NPS balance upon retirement is tax-free under Section 10(10D) of the Income Tax Act of 1961.
The minimum annuity percentage in NPS is fixed. Individuals who have a total NPS balance of above ₹2.5 lakhs must invest in an annuity. The individual needs to invest a minimum of 40% NPS balance into annuity plans. However, there is no cap on the maximum investment that you can make. So, one may choose to invest even 100% of the NPS balance towards NPS. In case the balance is below ₹2.5 lakhs, you may withdraw 100% of the balance as a lump sum.
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An annuity in NPS refers to the regular in some offered by NPS at regular intervals. Individuals need to choose one of the five types of annuity in NPS.
Individuals who have an NPS balance of above ₹2.5 lakhs need to invest a minimum of 40% of their NPS balance towards annuity. There is no cap on maximum investment.
Usually, it is not possible to change your annuity provider once it has been chosen after retirement. However, you must check with recent changes to stay updated.
Depending on the type of annuity plan you choose, your spouse or dependents may receive the income. In some types of the annuity plan, the annuity ceases after the death of the subscriber.
Yes. Under Section Section 80CCD(3) of the Income Tax Act of 1961, annuity income is taxable.
The higher interest rate on annuity means a higher pension and vice-versa. So, it is crucial to choose an annuity plan carefully.
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