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What is Annuity in NPS?

The National Pension Scheme is one of the popular voluntary retirement schemes. Backed by the government of India, NPS provides a regular retirement income through an annuity in NPS. An annuity is simply a set amount of regular income that the individual receives at a set frequency. NPS is one of the stable retirement income schemes that can help individuals have a financially sound retirement.

The annuity percentage in NPS is fixed at a minimum of 40% of the total corpus. This means that the individuals need to dedicate at least 40% of the NPS amount towards the annuity. They may withdraw the remaining 60% as a lump sum. However, anyone who chooses to exit the scheme prior to retirement needs to dedicate 80% of the NPS corpus towards an annuity.

Features of Annuity in NPS

Some of the striking features of annuity in NPS are:

  • Guaranteed Flow of Income

Through annuity in NPS, individuals build a guaranteed flow of retirement income. The annuity is received at a fixed interval every month so you can have financially stable years even after retirement.

  • Flexibility in Annuity

You have the choice to choose from the different types of annuity options. Thus, you get the freedom to plan your retirement in a way that best suits your needs.

  • Percentage of Annuity in NPS

The annuity percentage in NPS is 40% for retired people. Upon reaching the age of retirement, it is crucial to invest a minimum of 40% of the corpus to receive a regular annuity.

Note: If the NPS balance is below ₹2.5 lakhs, the individual may withdraw the entire amount.

Benefits of Annuity in NPS

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.

Types of Annuity Schemes in NPS

There are broadly five different types of annuity schemes in NPS, as explained below:

  • Life & Last Survivor with 100% Income

In this type of annuity scheme, the annuity 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.

  • Lifetime Income

In this type, the annuity is paid by the subscriber. After the subscriber passes away, the annuity ceases to be paid.

  • Lifetime Income with Capital Refund

The subscriber receives the annuity. After their death, the nominee receives the principal amount.

  • Life & Last Survivor with 100% Income with Capital Refund

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.

  • NPS - Family Income

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.

How to Choose the Right Annuity for Regular Income

As discussed above, there are five types of annuity in NPS. So, how to choose the right annuity? Here are some of the factors that you must consider:

  • Factors to Consider When Selecting an Annuity Plan

To choose the right annuity plan, the following factors must be considered:

  • It is essential to have a plan that provides long-term financial support for a stable retirement

  • The annuity percentage in NPS can be between 40-100%. So, choose an amount that best suits your income needs

  • If you have a dependent spouse or family members, you can choose the annuity plan accordingly to ensure a regular income even after you are no longer around. However, in such an annuity type, the income may be comparatively less.

  • Also, it is essential to keep up with the changing dynamics. It is better to choose a plan that you can also access electronically to avoid visiting physically during your retirement days.

Steps to Purchase an Annuity Plan in NPS

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%.

Tax Implications of Annuity in NPS

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.

Annuity Percentage in NPS

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.

Conclusion

Reading the above sections, you may now have a detailed understanding of the various benefits of annuity in NPS. Not only does it provide a regular income after retirement, but it also offers much-needed peace of mind. Being a one-time investment, you would receive income after the investment is done. Choose an annuity plan that suits your pension requirements!

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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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