NPS annuity and pension plans: how they pay and how they are taxed

A pension plan turns savings into a regular income after you stop working. For anyone in NPS, that income comes as an annuity. At a normal exit, a non-government NPS subscriber must use at least 20% of the corpus to buy one. The corpus is the total money built up in the account.

What is a pension plan?

A pension plan collects money while you work and pays it back as a regular income once you stop. Some plans pay from a pool you built yourself, such as the National Pension System (NPS) or an insurer's pension plan. Others pay by a set rule: the Employees' Pension Scheme (EPS) through your employer, and Atal Pension Yojana through a bank or post office account.

What is an annuity, and how does the NPS annuity work?

An annuity is a product you buy from a life insurer with a lump sum, meaning money paid in one go. It then pays you a regular pension. At an NPS exit, part of your corpus must buy one.

A normal exit is at 15 years of subscription or age 60, whichever is earlier (or at retirement, called superannuation, for corporate subscribers). An exit before that is a premature exit. The shares that must buy an annuity, for non-government subscribers from 16 December 2025:

• Normal exit: at least 20% buys an annuity, and up to 80% can be taken as a lump sum or drawn at regular intervals (a systematic withdrawal). Before 16 December 2025 the split was 60% cash and 40% annuity.
• Premature exit: at least 80% buys an annuity.
• Small corpus: at a normal exit, ₹8 lakh or less can be withdrawn in full. Over ₹8 lakh and up to ₹12 lakh, up to ₹6 lakh can be a lump sum. The rest goes to regular unit sales over at least six years, or to an annuity. On a premature exit, ₹5 lakh or less can be taken in full.
• Delay: exit and annuity purchase can be put off until age 85.

Government subscribers follow a different split. At retirement at least 40% of the corpus must buy the default annuity, and on a premature exit at least 80%. The same ₹8 lakh, ₹8 to ₹12 lakh and ₹5 lakh bands apply. For the full exit rules, see our article on the new NPS rules and tax benefits.

Take Lakshmi, 58, retiring from a private bank in Hyderabad. She joined NPS at 40, so after 18 years she has a normal exit, and her corpus is ₹40,00,000. At least ₹8,00,000 must buy an annuity. Up to ₹32,00,000 can come out as cash. Cash at exit is tax-free only up to 60% of the amount payable, which is ₹24,00,000 here. As a government subscriber she would need at least ₹16,00,000. On a premature exit, either kind of subscriber needs at least ₹32,00,000.

Who provides the NPS annuity?

The annuity comes from an annuity service provider. That is a life insurance company regulated by IRDAI, the Insurance Regulatory and Development Authority. It is also empanelled, meaning approved, by PFRDA, the Pension Fund Regulatory and Development Authority, which regulates NPS. Seventeen are on the list published on 18 June 2026. If a non-government subscriber does not choose, a default insurer and a default annuity apply.

What kinds of annuity can you choose?

At NPS exit you pick the insurer and the type. The common types are a pension for your life only, or for you and then your spouse. Each comes with or without the purchase price returned to your nominee, and there is also a family option. The purchase price is the amount you paid for the annuity. A nominee is the person you name to receive the money. The five common variants are:

• Annuity for life with return of purchase price.
• Joint life annuity with return of purchase price.
• NPS family income with return of purchase price.
• Annuity for life without return of purchase price.
• Joint life annuity without return of purchase price.

A life annuity pays a fixed pension to you for life. A joint life annuity pays the full amount to your spouse after you. The family income option pays your spouse, then your mother, then your father, and then returns the purchase price to your nominee. Not every insurer offers every variant, and the options and pricing differ between insurers.

These variants pay for life, not for a set number of years. Only the "return of purchase price" types give the purchase price back; the others do not.

A few more points shape the choice:

• How often it pays: monthly, quarterly or yearly, as you choose. Government subscribers get monthly payments only.
• The rate: it is fixed when you buy.
• Cancelling: once the free-look period is over, you cannot cancel the annuity or move to another insurer or scheme. The free-look period is the time, set by each insurer, within which you can still cancel.
• Early exit: an annuity bought on an early exit starts at the insurer's minimum age for it, not at 60. That age is, for example, 30, 35 or 38.
• Comparing rates: you can compare rates on the websites of the record-keeping agencies that keep NPS accounts, and on the insurers' sites.

The government default annuity covers the subscriber and spouse for life, then the subscriber's mother, then father, after which the purchase price goes to the children.

How is an annuity taxed?

The money used to buy an NPS annuity is not taxed when you buy it. The pension is taxed as income when you receive it. It is added to your total income and charged at your slab rate, the rate for your income band.

Back to Lakshmi. Assume a rate of 6% a year. That is an assumption for illustration, not a quote; real rates depend on the variant and the insurer. Her ₹8,00,000 would pay ₹48,000 a year, or ₹4,000 a month. Each year's ₹48,000 is taxed at her slab rate.

Insurer plans have their own rules. Premiums for a deferred annuity contract with no cash option can count as a tax deduction. A deferred annuity collects premiums for some years first, and its pension starts at the end of that period. So can premiums for an annuity plan from LIC or another insurer the government has notified, or for an insurer's pension plan. You can claim up to ₹1,50,000 a year, under the old tax regime only, under section 123 (the old Section 80C). The deductions guide has the limits.

The pension from an insurer's annuity is taxed as part of your income at your slab rate. For an insurer pension plan whose premium you claimed under section 123 (the old Section 80CCC), the cash taken at vesting is tax-free. Vesting is the end of the years in which the plan collects premiums. The pension from such a plan is taxed, and so is any money paid out if you surrender the plan before vesting.

What happens to the annuity when you die?

It depends on the type you chose. After you buy the annuity:

• A joint life annuity keeps paying your spouse.
• The family income option runs from spouse to mother to father, and then the purchase price goes to your nominee.
• Only the "return of purchase price" types give the purchase price to your nominee.

Before you buy, a non-government subscriber's nominee gets the whole balance tax-free, as cash, in instalments or as a pension.

If a government employee dies in service, at least 80% of the balance buys a pension for the family. This does not apply where the balance is ₹8 lakh or less.

What other pension plans are there in India?

Besides NPS, there are insurers' pension products, EPS and Atal Pension Yojana.

Insurer products. Insurers sell two kinds. An immediate annuity starts paying soon after you hand over a lump sum. A deferred pension plan collects premiums for some years first. At vesting, you can take up to 60% as cash, called commutation. You must use the rest to buy an annuity, which IRDAI says must pay for life.

EPS. The Employees' Pension Scheme, 2026 replaced the older scheme on 29 June 2026, along with the provident fund and insurance rules. Of the employer's 12%, 8.33% of the wages, up to a ceiling of ₹25,000 a month from 17 September 2026, goes to the pension fund. The pension starts at 58 once you have ten years of service, or from 50 at 4% less for each year before 58. It cannot be less than ₹1,000 a month. Someone who leaves with under ten years can take a one-time withdrawal benefit three years after the last contribution. The other choice is to keep the service on a scheme certificate. More in our PF withdrawal rules article.

Atal Pension Yojana. It started on 1 June 2015 and is run by PFRDA. It is for citizens aged 18 to 40 with a bank or post office savings account. Anyone who is or has been an income-tax payer cannot join, from 1 October 2022. It pays a fixed pension of ₹1,000, ₹2,000, ₹3,000, ₹4,000 or ₹5,000 a month from 60, set by the government. The spouse then gets the same pension, and after both, the nominee gets the savings built up to age 60.

PMVVY. This LIC pension plan (Plan 856) is listed by LIC as withdrawn on 31 March 2023. If you already hold a policy, it keeps paying pension for its 10-year term.

How can you compare pension plans?

There is no single plan that suits everyone, so compare them on fixed points. Check whether the payout stays fixed or depends on markets, and whether it lasts for life, for two lives or a set term. Then look at what happens to the money on death, what you give up in access, who can join, and how the payout is taxed.

Can a mutual fund give you a regular income instead?

Yes. A systematic withdrawal plan (SWP) sells a set amount of your mutual fund units at regular intervals, so you get a regular payout. Unlike an annuity, the units stay yours, and you can sell them on any business day.

But the payout is not fixed for life, and the value of the units can fall. Our article on the systematic withdrawal plan explains how long the money can last, and the SWP calculator lets you test an amount.