What is Annuity in NPS – Features and Benefits of NPS Annuity


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Retirement is regarded as the golden period of one’s life. However, to make sure that it stays that way, you must have steady income coming in throughout your retired life. For steady income, you can trust the National Pension Scheme (NPS).  

If you want to make your retirement the best time of your life, start investing in beneficial retirement schemes soon. The National Pension Scheme is one such plan managed by Pension Fund Regulatory and Development Authority (PFRDA) that aims at securing the retired lives of individuals. Under this plan, it is mandatory for the policyholder to comply by the lock-in period until they turn 60-years old.

Under NPS, the applicant can select the fund and the asset class to invest the fund. NPS is not a mere fund accumulated retirement policy. Rather, it provides the policyholder with a lump-sum amount at the time of retirement as well as allow annuity on a regular basis once they are retired. So, under this policy, 40 % of the fund is mandatorily invested in the annuity NPS scheme.

Also Read: Difference between National Pension Scheme and Atal Pension Yojana

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Let’s take a look at what is annuity in NPS or annuity meaning in NPS and how the plan serves beneficial for the retired individuals.

What is Annuity in NPS?

Annuity in NPS is an investment option. It presents regular annuity payments to the investor for a particular period of time or for life time.  To ensure the financial stability of the retired individuals, NPS has introduced the annuity schemes to its plans.

From the total corpus investment under NPS annuity plans, 60% can be received as lump sum money after retirement, while the remaining 40 % is received as regular pay or annuity every month after retirement to the investor and to his/her spouse after the death of the investor.

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Features of Annuity in NPS

There are various things to consider when discussing annuity in NPS. It is better to know all the aspects of NPS before buying a plan so that you can avail the best annuity plan for NPS. Below are some features of annuities in NPS:

  • The policyholder under NPS annuity has to keep a minimum amount of 40 % of the corpus for investment purpose
  • If a policyholder wants to surrender an NPS plan before the age of 60, they must use 80 % of the corpus so that they remain eligible for the regular annuities.
  • The annuities under NPS are offered by PFRDA empanelled annuity service providers
  • Annuity plans are of five types which people can invest in
  • The policyholder under this scheme receive annuity for life
  • The annuity for life is transferred to the spouse after the death of the policyholder
  • In case of death of spouse, the annuity for life is returned to the dependent parents or kids of the policyholder
  • The earnings received as annuity are taxable under NPS, while the corpus lump sum is tax-free.

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Advantages of Annuity in NPS

Annuity in NPS serves as a blessing for many retired people. Here are some benefits of the annuity scheme in NPS:

  • It allows better management of money – For many people who are not knowledgeable enough to handle large corpus, NPS serve as a best policy. These people find it difficult to handle large sums of money or to use them to get regular and steady income. Further, they are also scared to use their retirement money in not so profitable options.

With NPS the risk of going out of money by investing in bad schemes is lowered to a great extent because NPS mandates that annuity should be purchased using the 40% of corpus to make it stable with a regular monthly income for entire retired life.

  • It saves individuals from financial risks after re-investment – Coming in of a steady income on a monthly basis after retirement is highly beneficial for retired people and an annuity in NPS assures that. Unlike in case of other short term policies, annuities allow steady rate of interest on their reinvestment fund and eliminates it.
  • No Cap Investment – Most retirement plans come with a specific investment cap. Hence, one cannot invest beyond the maximum cap fixed for particular plans. However, such investment caps are not compulsory for annuity in NPS.
  • Taxability – You may note that the 60 % corpus under NPS is not taxable. However, the annuity earnings you receive are taxable. However, looking at the benefits of NPS, it can be said that despite tax disadvantages, annuity in NPS serves as an advantageous project.

Related Articles by PayBima

  1. What is an Annuity? What are its Benefits and Different Types of Annuities?
  2. NPS Tier 2 Account: Advantages and Disadvantages

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FAQs: Annuity in National Pension Scheme

What choices of investments are available for NPS policyholders?

NPS applicants can have two investment alternatives to choose from which they must decide just after confirming their fund manager. The choice of investments available are active and auto. Auto investment is the one where funds are automatically invested in different asset classes as pre-defined depending on the policyholder’s age. On the other hand, in case of active investment, the policyholder has the facility to choose the amount of funds that they want to allocate into various asset classes. However, this should be done after understanding what is NPS annuity.

Name the different asset classes where the NPS funds are invested?

NPS allow four kinds of asset classes for investment of funds with each class having a separate value of return and risk. As per the risk appetite of people, they can divide the funds accordingly. 

The four kinds of asset classes are as mentioned below:

Alternative investment funds or asset class A 
Equity or asset class A
Corporate debt or asset class C
Government securities or asset class G

What does default annuity scheme mean under NPS?

The Default Annuity Scheme allows the subscriber and his/her spouse an annuity for life along with providing them with a purchase price as per the policy term. In the event of demise of the policyholder, the annuity will continue to benefit the spouse/nominee of the investor as per the policy paper. When the investor, spouse and dependent parents die, the purchase price is handed over to their children or legal heir.

What is the annuity payment period under NPS?

As per the NPS annuity rules, the NPS annuity payment time can be 5, 10, 15, and 20 years. This is a minimum payable period.  Once this period is over the annuity paid to the policyholder for life. Even after the policyholder dies, the purchase price of the policy is returned to the nominee of the investor.

Can a NPS policyholder change the annuity plan or annuity plan provider after buying the plan?

No, the policyholder under NPS policy cannot change the annuity scheme after buying the plan. If they want to make any changes, they have to do it during the free look period.

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Jan 31, 2023
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PayBima is an Indian insurance aggregator on a mission to make insurance simple for people. PayBima is the Digital arm of the already established and trusted Mahindra Insurance Brokers Ltd., a reputed name in the insurance broking industry with 17 years of experience. PayBima promises you the easy-to-access online platform to buy insurance policies, and also extend their unrelented assistance with all your policy related queries and services.

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