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Annuity in NPS: Know Features & Benefits
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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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Continuing to receive a steady income even after retirement gives you financial freedom during your life’s golden years. The annuity scheme in NPS regulated by the PFRDA lets you do just that. Depending on the scheme, it is an investment avenue offering regular dividends for life or a stipulated time. Safeguarding financial stability after retirement, the scheme provides steady income to the subscriber and their spouse after demise. Read on to find out what exactly is an annuity in NPS, its features, benefits, and other crucial information.
What is Annuity in NPS?
Annuity in NPS refers to the monthly payment or income that your annuity scheme NPS provides. The amount you receive depends on various factors, including your annuity rate, expected annuity return, percentage of corpus available for the annuity plan, etc. After contributing a lump sum, you receive regular income after retirement to maintain a steady cash flow. That means you don't need to depend on your loved ones or use up your savings for survival.
You can invest in any of these five types of NPS annuity schemes:
Features of Annuity in NPS
Let’s look at the features of the annuity scheme in NPS:
Annuity investment in NPS provides a steady flow of income even after retirement, giving you financial freedom and confidence during your golden years. The annuity payments arrive at fixed dates each month so that you can plan your expenses efficiently.
There are five types of annuity schemes to choose from. Opting for one that best suits your investment needs is crucial. The right selection gives you and your family much-needed financial protection after retirement.
In an ordinary annuity scheme in NPS, the formula to calculate the annuity percentage is A = P(1 + rt). Factors influencing the annuity percentage in NPS include your age, annuitisation, spouse coverage option, policy rider, death benefit, and the type of annuity scheme you choose.
Benefits of Annuity Investment in NPS
Annuity scheme NPS offers multi-faceted benefits to subscribers and their families, including the following:
Once you subscribe to an annuity scheme in NPS, you can rest assured that you have secured your retirement years. You will continue receiving a steady flow of income even after retirement, guaranteeing lifetime income security for financial freedom. Since it assures income for a lifetime, it protects against longevity risk, with the income stream not stopping till your last breath.
Annuity scheme NPS subscribers don’t need to worry about taxation, as 60% of the corpus is non-taxable. Even though the annuity income is taxable, the tax bracket is very low and easily affordable for retired subscribers. Therefore, an annuity investment in NPS facilitates efficient tax planning, allowing you to stay on top of your finances during retirement.
You get assured income for a lifetime, depending on the type of annuity scheme NPS you choose. Moreover, after your demise, your spouse receives the annuity benefits until death. Some NPS annuity schemes even allow you to add a nominee to receive the benefits, ensuring financial security for your loved ones.
Understanding Annuity Scheme in NPS
NPS stands for National Pension System, a retirement savings scheme that provides a steady income stream after retirement. After subscribing, you make timely contributions to the scheme during your earning years and receive up to 60% of the accumulated corpus as a lump sum at retirement. You buy an annuity scheme in NPS with the remaining 40%, assuring a steady source of income during your retirement years.
Although purchasing an annuity is compulsory, you can choose an annuity plan according to your requirements and goals. While an annuity-for-life scheme provides annuity payments to the subscriber only and stops after their demise, other schemes also provide annuity payments to their spouses. Some scheme types also provide annuity benefits to the subscriber’s nominees and family members. So, choose an annuity investment in the NPS scheme according to your family size and financial requirements to receive the maximum benefits.
Annuity Percentage in NPS
From the 100% NPS corpus, you can withdraw up to 60% as a lump sum at retirement and buy an annuity with the remaining 40% to receive a regular monthly payment for life or till a stipulated period. The annuity service provider adds some money, distributing the earnings at regular intervals. Factors influencing your annuity percentage include the following:
The formula to calculate your annuity percentage is A = P(1 + rt). Here,
A = Total accrued amount (principal + interest)
P = Principal amount
I = Interest amount
r = Annual rate of interest in decimal
t = Period in months or years
Here is an example:
If you start an annuity plan at 30 years of age and contribute ₹ 5000 per month to your NPS account at a 12% expected return rate, your expected returns will be as follows:
₹ 18 Lakh
₹1,76,49,569
₹1,05,89,741
₹35,299
Conclusion
As you understand what annuity is in NPS, you must realise the benefits of investing in one and choosing the right plan. If you wish for a secured and well-planned retirement, explore the available annuity scheme NPS options and get in touch with Kotak to subscribe to an appropriate investment plan.
Frequently Asked Questions (FAQs)
Q: Can we take a 100% annuity from NPS?
No, you can withdraw 60% of the accumulated NPS corpus at retirement and purchase an annuity with the remaining 40%.
Is NPS annuity taxable?
60% of the NPS annuity is non-taxable. The remaining 40% is taxable under a very low tax bracket.
Q: How do I go about investing in an annuity within NPS
Look for an annuity service provider under the PFRDA panel and contact them for annuity investment in NPS.
Q: Can I change my annuity option after purchasing it in NPS?
Yes, you can change your annuity option after purchasing it in NPS.
Are there different annuity schemes to choose from in NPS?
Yes, there are five types of annuity schemes to choose from in NPS, including Lifetime Income with No Capital refund, Lifetime Income with Capital Refund, Life and last Survivor with 100% Income, Life and last Survivor with 100% Income with Capital Refund, and NPS - Family Income.
Can I customise my annuity plan within NPS?
NPS annuity plans are not customisable, but you can choose one that best suits your requirements and family needs.
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