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How it Works Types of Annuities How to Purchase How to Choose Taxation Rules Exit Types Pros and Cons Is NPS Annuity Secure FAQs

What is Annuity in NPS & How it Works?

The Annuity in the National Pension System (NPS) is one of the most popular retirement savings options in India. It is designed to provide financial security after retirement by combining long‑term savings with regular income. While the savings in NPS grow during your working years, the annuity ensures that you receive a steady income once you retire.

At the time of maturity, 60% of your NPS corpus can be withdrawn as a lump sum, and the remaining 40% must be used to purchase an annuity. This annuity portion is converted into a fixed monthly payout, which acts like a pension and helps you manage expenses when your regular salary stops. The idea is simple: you save during your career, and after retirement, those savings are used to give you a stable income for life

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How Does Annuity Work in the National Pension Scheme?

Annuity in NPS is the process of turning part of your retirement savings into a fixed income stream. At retirement, you must use a portion of your corpus to buy an annuity plan, which then pays you a regular pension. Below is an illustration showing how annuity works within the National Pension Scheme.

Accumulation Phase

You contribute to NPS during your working years. These contributions grow into a retirement corpus.

Exit/Maturity (Age 60)

At retirement, you get access to your total accumulated corpus.

Mandatory Annuity Purchase

You must use at least 40% of this corpus to buy an annuity from an authorized Annuity Service Provider (ASP).

Lump Sum Withdrawal

You can withdraw the remaining up to 60% of your corpus as cash.

Annuity Payout

The ASP starts paying you a regular pension which can be monthly, quarterly, or annually, based on the annuity plan you choose.

Types of Annuities Available in NPS

NPS offers different annuity options that are suitable for retirees’ needs, each with its own payout style and benefits.

1. Lifetime Annuity

Lifetime annuity option provides a fixed pension for the rest of your life. It ensures financial stability by giving you a guaranteed income regardless of market changes. Once you pass away, the payments stop, and no money is returned to your family. It is simple and secure but does not offer benefits to dependents. There is no capping on the pension amount—you continue to receive it for as long as you live.

2. Annuity with Return of Purchase Price (ROPP)

In annuity with Return of Purchase Price (ROPP), you receive a pension for your entire life. After your death, the amount you originally invested to purchase the annuity is returned to your nominee. This option is preferred by many retirees who want to ensure financial security for their families, although the pension amount is typically lower compared to lifetime annuity plans without return of purchase price.

3. Joint Life Annuity

Joint life annuity plan pays pension to you for life and then continues to your spouse after your death. It ensures that both partners have financial support even if one passes away. The payout amount is slightly lower than single-life annuity, but it provides peace of mind for couples.

4. Annuity with Increasing Income

In annuity with increasing income, the pension starts at a fixed amount and increases every year by a certain percentage (commonly 3%). It helps retirees manage inflation and rising expenses over time. However, the initial payout is lower compared to fixed annuity plans.

5. Annuity for a Fixed Period

In an Annuity for a Fixed Period plan, the pension is paid for a specific duration such as 5, 10, or 20 years, irrespective of whether the annuitant survives the entire term. If the annuitant passes away during this period, the nominee continues to receive the pension until the chosen term ends. This option is suitable for individuals who prefer a guaranteed income for a predetermined time frame.

How to Purchase Annuity from NPS?

Buying annuity from NPS is simple and structured.

Step 1: Exit Request

Submit your exit request at retirement through the NPS portal or POP (Point of Presence).

Step 2: Corpus Allocation

Decide how much of your corpus will go into annuity (minimum 40%) and how much as lump sum withdrawal.

Step 3: Select ASP

Choose an Annuity Service Provider (ASP) registered and approved under the National Pension System. You can select from any of the authorised providers offering annuity plans under NPS.

Step 4: Pick Plan

Select the annuity type that is suitable for your needs, lifetime, joint life, return of purchase price, or increasing income.

Step 5: Pension Start

The ASP begins regular pension payouts as per your chosen frequency (monthly, quarterly, or annually).

How to Choose the Best Annuity Plan?

Choosing the right annuity depends on your retirement needs.

Assess Income Needs: Understand how much regular income is required to manage post‑retirement expenses.
Evaluate Family Protection: Choose return‑of‑purchase‑price annuities if ensuring a payout to nominees is important.
Check Spouse Coverage: Consider a joint life annuity to ensure continued income for a surviving spouse.
Compare Provider Offerings: Review annuity rates, terms, and plan features across authorised providers.
Select Payout Frequency: Decide between monthly, quarterly, half‑yearly, or annual pension based on cash‑flow needs.
Account for Inflation: Consider inflation‑linked options if maintaining purchasing power over long periods is a priority.

Note: For a more balanced financial plan, many individuals complement annuities with a suitable life insurance plan or a pure‑protection term insurance plan to ensure both long‑term income and family security.

Taxation Rules for National Pension Scheme (NPS) Annuity

Understanding how NPS annuity is taxed helps you plan your retirement income better.

Pension Income is Taxable

The monthly pension you receive from the annuity is treated as regular income. It is added to your yearly income and taxed according to your income tax slab.

Lump Sum Withdrawal is Tax-Free

At retirement, you can withdraw up to 60% of your NPS corpus as a lump sum. This withdrawal is completely tax-free, so you don’t pay any tax on this portion.

Annuity Purchase is Tax-Exempt

The amount you use to buy the annuity (minimum 40% of corpus) is not taxed at the time of purchase. Tax applies only when you start receiving pension payouts from the annuity provider.

Exit Types Under the National Pension Scheme (NPS)

NPS offers three clear exit options, each with its own rules and eligibility criteria.

Exit Type	What It Means	Rules	Eligibility Criteria
Normal Exit	Retirement exit at age 60 or later.	Up to 60% of corpus can be withdrawn tax-free; minimum 40% must be used to buy annuity.	Available to all subscribers who exit at or after age 60.
Early Exit	Exit before reaching age 60.	Only up to 20% of corpus can be withdrawn; minimum 80% must be used to buy annuity.	Allowed after 10 years of NPS subscription, before age 60.
Exit on Death	Exit if the subscriber passes away before maturity.	Entire corpus is paid to nominee/legal heir; they may choose lump sum or annuity.	Applicable if subscriber dies before maturity.

What are the Pros and Cons of Annuity in NPS?

Annuity in NPS provides both security and limitations for retirees. Here are the key pros and cons of choosing an annuity under NPS:

Pros	Cons
Guarantees a fixed and regular pension for life.	Pension amount is usually lower compared to other investment options.
Protects against market risks and fluctuations.	Once purchased, the annuity cannot be changed or withdrawn.
Offers multiple options like Life Annuity, Joint Life, and ROP.	Limited flexibility in payout frequency and growth choices.
Provides family security through nominee or spouse benefits.	Most annuity plans do not adjust payouts for inflation.
Ensures disciplined income flow, reducing risk of overspending.	Annuity rates offered by providers are often lower than market returns.

Is Annuity in the NPS a Secure Option?

Annuity in the NPS is considered a secure option because it guarantees a fixed pension for life and remains unaffected by market fluctuations, providing stable and predictable income after retirement; however, despite being safe, it often offers lower returns than other investment products and most annuity plans are not inflation‑adjusted, which means the purchasing power of the pension may reduce over time.

Choosing the best annuity plan under NPS is ultimately about balancing security, family needs, and long-term financial stability. By understanding the different annuity options available in India, you can align your choice with your retirement goals.

While the pension is taxable and returns may be modest, it provides stability and guaranteed payouts, making it a dependable way to manage post-retirement income.

FAQs about Annuity in NPS

Can I withdraw my NPS corpus without buying annuity?

No, at least 40% of the NPS corpus must be used to purchase annuity at normal exit. Only the remaining 60% can be withdrawn as a lump sum. This rule ensures that retirees have a guaranteed pension income for life.

What happens if I do not choose an annuity option in NPS?

If you do not select an annuity option at maturity, the default requirement applies—40% of the corpus will be mandatorily allocated to annuity. The rest can be withdrawn as a lump sum. Without annuity, you cannot access the pension benefit of NPS.

Is partial withdrawal allowed in NPS apart from annuity?

Yes, partial withdrawal up to 25% of contributions is allowed for specific purposes like higher education, marriage, medical treatment, or house purchase. This facility is separate from the annuity purchase requirement and can be used during the subscription period.

Can NRIs invest in NPS and get annuity benefits?

Yes, Non‑Resident Indians (NRIs) are eligible to invest in NPS and avail annuity benefits. They must comply with FEMA regulations and provide valid KYC documents. At maturity, annuity payouts are credited to their Indian bank account.

Can I choose my NPS annuity service provider?

Yes, subscribers can choose their annuity service provider from the list of life insurance companies empanelled by PFRDA. These providers are licensed by IRDAI and authorized to offer annuity products under NPS. The choice of provider must be made at the time of purchasing the annuity.

What is the minimum annuity purchase requirement in NPS?

At least 40% of the NPS corpus must be used to buy an annuity at normal exit (age 60). In case of early exit before 60, 80% of the corpus must be converted into annuity. On death, the entire corpus is transferred to nominee, but if annuity is chosen, 80% is required.

Can I switch annuity service providers in NPS later?

No, once an annuity is purchased from a chosen service provider, it cannot be switched or transferred to another provider. The annuity contract is binding and remains fixed for life. This is why choosing the right provider at the start is critical.

How is annuity calculated in NPS?

Annuity in NPS is calculated based on the corpus amount allocated, the annuity option selected, and prevailing annuity rates offered by the provider. Factors like age, gender, and type of annuity plan (life, joint life, return of purchase price) also influence the monthly payout.

What are the latest NPS annuity rates?

NPS annuity rates vary across providers and depend on the annuity type chosen. As of 2025, rates typically range between 5%–7% annually, but they are subject to market conditions and provider policies. It is advisable to check the updated rates before purchase.

Can I use an NPS annuity calculator?

Yes, NPS annuity calculators are available online from providers and financial portals. They allow subscribers to estimate monthly pension based on corpus, annuity type, and provider rates. This helps in planning retirement income more accurately.

Is annuity income from NPS taxable?

Yes, annuity income received from NPS is fully taxable as per the subscriber’s income tax slab. While the lump sum withdrawal portion of NPS is tax‑free up to 60%, the annuity payouts are treated as regular income.