What is Annuity in India? (2025 Guide & New 0% GST Rule)

This article covers the fundamentals of annuity plans in the Indian financial landscape for FY 2025-26. We analyze the mechanism of converting a lump sum into a lifelong income stream and the critical regulatory update of 0% GST on individual annuity premiums effective September 2025. The guide also examines current interest rates (6.5%–7.5%), tax implications under the new regime, and the strategic role of annuities in retirement planning alongside NPS and EPF.

Annuity is essentially a contract between you and a life insurance company. You pay a lump sum (or a series of payments), and in return, the insurer guarantees a regular income stream for life. Think of it as the reverse of life insurance. In life insurance, you pay premiums to get a lump sum on death. In an annuity, you pay a lump sum to get premiums (pension) while you are alive. For Indian investors, this is the closest substitute to a government pension. With the removal of GST on individual annuity purchases in late 2025, the entry cost has dropped, making it a more efficient tool for retirees seeking guaranteed cash flow.

How Do Annuity Plans Work in India?

The mechanism of an annuity is split into two distinct phases: Accumulation and Vesting.

1. Accumulation Phase

This is the investment stage. You build your corpus by paying premiums. You can do this via a lump sum (single premium) or regular installments over 10-15 years. During this phase, your money grows. Insurance companies invest this capital in long-term bonds and government securities to secure future payouts.

2. Vesting (Distribution) Phase

This is when the payouts begin. The “vesting age” is the age at which you start receiving your pension. As of November 2025, most insurers allow vesting anytime between age 30 and 85. When the payout starts, the insurer calculates your “Annuity Rate” based on your age and prevailing interest rates.

Example:
If you invest ₹1 Crore in an immediate annuity plan at age 60, the insurer might offer a rate of 6.5%. You would receive ₹6.5 Lakh per year (approx. ₹54,166 per month) for the rest of your life. This rate is locked in. Even if market interest rates fall to 4% in the future, your payout remains fixed.

Different Types of Annuities in India

Choosing the right type is critical because once purchased, annuity terms are usually irreversible. As per current IRDAI regulations, these are the primary categories:

1. Immediate Annuity

This is for investors who have a lump sum ready (e.g., retirees with PF corpus). You pay the money now, and the pension starts immediately (usually the next month).

• GST Update: As of September 22, 2025, the GST on individual immediate annuity plans is 0% (previously 1.8%).
• Best For: Retirees needing instant monthly income.

2. Deferred Annuity

You invest now, but the pension starts later (e.g., after 5, 10, or 15 years). Your money grows during this “deferment period.”

• Example: You are 45. You invest ₹50 Lakh. You choose to start the pension at 60. The corpus grows for 15 years, resulting in a higher payout rate later.
• Best For: Salaried professionals in their 40s planning for future retirement.

3. Life Annuity with Return of Purchase Price (ROP)

This is the most popular option in India. You receive a pension for life. Upon your death, the original investment amount (Purchase Price) is returned to your nominee.

• Trade-off: The interest rate is lower (approx. 6.0%–6.5%) compared to plans without ROP.

4. Joint Life Annuity

The pension covers you and your spouse. If you pass away, your spouse continues to receive the pension (usually 50% or 100% of the amount) for their lifetime.

Data Source: Market averages for November 2025. Rates subject to change.

Advantages of Annuity Plans

1. Guaranteed Lifetime Income

The biggest risk in retirement is “longevity risk”—living longer than your savings. An annuity eliminates this. Whether you live to 80 or 100, the payout continues. It acts as a salary replacement that never stops.

2. Zero GST on Premiums (New 2025 Rule)

As per the GST Council’s reform effective September 22, 2025, individual annuity plans now attract 0% GST. Previously, a 1.8% GST was levied on the purchase price. On a ₹1 Crore investment, this saves you ₹1.8 Lakh instantly, allowing the entire amount to generate income.

3. No Cap on Investment

Unlike the Senior Citizen Savings Scheme (SCSS), which has a deposit limit of ₹30 Lakh, annuity plans have no upper limit. High-net-worth individuals (HNIs) can park ₹5 Crore or ₹10 Crore to generate a substantial monthly income matching their lifestyle.

4. Reinvestment Risk Protection

Bank FD rates fluctuate. If you lock in an annuity rate of 6.5% in 2025, you are protected even if FD rates drop to 4% in 2030. Your rate is guaranteed for life.

Eligibility Criteria for Annuity Plans in India

Insurers have relaxed eligibility norms to encourage retirement planning. Based on current product brochures from major insurers (LIC, SBI Life, HDFC Life):

• Minimum Entry Age: Typically 30 years (some deferred plans allow 18 years).
• Maximum Entry Age: Usually 85 years (some plans extend to 99 years).
• Minimum Investment: Varies by insurer, but typically ₹1 Lakh to ₹2 Lakh.
• Residency: Available to Resident Indians and NRIs (Non-Resident Indians). NRIs can invest via NRE/NRO accounts.

Note: For NPS subscribers, purchasing an annuity is mandatory upon exit (minimum 40% of corpus under current rules, though PFRDA has proposed reducing this to 20% for non-government subscribers).

Tax Implications of Withdrawing from an Annuity

While the purchase of an annuity is now GST-free, the income is taxable. Understanding the tax treatment is crucial for your net return calculation.

1. Taxation of Payouts

The monthly or annual pension you receive is treated as “Income from Other Sources.” It is added to your total income and taxed according to your slab rate.

Example:

• Investor: Mr. Sharma (Age 62)
• Annuity Income: ₹6 Lakh/year
• Other Income: ₹4 Lakh/year
• Total Income: ₹10 Lakh
• Tax Regime: New Tax Regime FY 2025-26
• Tax Liability: Since income is under ₹12 Lakh, Mr. Sharma pays zero tax (due to the increased rebate u/s 87A). However, if his income exceeds the threshold, slab rates apply.

2. Tax Deduction on Premiums

Investments in deferred annuity plans are eligible for tax deduction under Section 80CCC. However, this falls within the overall ₹1.5 Lakh limit of Section 80C.

3. Surrender Taxation

If you surrender an annuity policy (only allowed in specific “Return of Purchase Price” plans), the surrender value is treated as taxable income in the year of receipt.

Conclusion

Annuities are the anchor of a secure retirement portfolio. While they may not offer the high returns of equity mutual funds, they provide something arguably more valuable: certainty. In FY 2025-26, the removal of GST on premiums has made them significantly more attractive. By locking in a rate today, you immunize your cash flow against future interest rate cuts. However, since the income is taxable, they work best when combined with tax-efficient instruments like SCSS or systematic withdrawals from mutual funds.

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FAQs on Annuity

1. What is 40% Annuity in NPS?

Under current PFRDA rules (November 2025), NPS subscribers must use at least 40% of their accumulated corpus to purchase an annuity upon retirement. The remaining 60% can be withdrawn as a tax-free lump sum. Note: PFRDA has proposed reducing this mandatory limit to 20% for non-government subscribers; investors should check for the final notification.

2. How Much Does a $100,000 Annuity Pay Per Month After?

In the Indian context, $100,000 is approximately ₹85 Lakh. At current annuity rates of ~6.5% (with Return of Purchase Price), this corpus would generate roughly ₹46,000 per month pre-tax. If you choose a plan without return of capital (rate ~7.5%), the payout could rise to approx. ₹53,000 per month.

3. What’s the Difference Between a Pension and an Annuity?

“Pension” typically refers to the retirement benefit provided by an employer (like government pension), where the accumulation happens during service. “Annuity” is a product you purchase yourself from an insurance company using your own savings. Technically, an annuity is the financial instrument used to distribute pension income.

4. What is the Biggest Disadvantage of an Annuity?

The biggest disadvantage is lack of liquidity. Once you buy an annuity, your capital is locked. You cannot easily withdraw the principal amount for emergencies (except in specific critical illness clauses). Additionally, annuity income is fully taxable at your slab rate, unlike the tax-free withdrawals from PPF.

5. Is annuity income tax-free in India?

No, annuity income is not tax-free. It is treated as “Income from Other Sources” and taxed according to your income tax slab. However, the commuted portion (the lump sum you withdraw, e.g., the 60% from NPS) is tax-free. Only the regular monthly pension payouts are taxable.