NPS Annuity Explained: What Most People Overlook

Over the weekend, I was having lunch with a friend when I asked him a simple question:

"Do you have an NPS account?"

His answer surprised me.

"No. I don't like the compulsory annuitisation at retirement."

I have heard this concern from many people over the years. There seems to be a common perception that buying an annuity means giving away your hard-earned money.

I see it a little differently. Here are a few reasons:

1. The Price of Certainty

NPS requires only a prescribed minimum portion of your retirement corpus to be used for purchasing an annuity (currently 20% at normal exit).

That portion is meant to provide a guaranteed income for life. While guaranteed products may not deliver the same returns as market-linked investments, they offer something equally valuable in retirement: certainty of income regardless of market movements.

2. Don't Ignore the Tax Arbitrage

NPS offers tax benefits under both the old and new tax regimes. Many people, like my friend, focus only on annuitisation and overlook the tax savings they enjoy during the accumulation phase.

For individuals in higher tax brackets during their working years, these tax benefits can significantly offset the perceived opportunity cost of allocating a portion of the retirement corpus to an annuity.

3. Your Annuity Money Doesn't Necessarily Disappear

Many people assume that once they purchase an annuity, the money is gone forever.

That's not always true.

NPS subscribers can choose annuity options that include Return of Purchase Price.

This means:

• You receive a regular pension for life.
• On your demise, the original purchase price is returned to your nominee.
• Your retirement income is protected while your capital can continue as a legacy for your family.

4. The Tax on Annuity May Not Be as Burdensome as You Think

Yes, annuity income is taxable.

However, retirement often brings a different tax profile:

• Salary income has ceased.
• Taxable income may be lower.
• You continue to benefit from the applicable exemption limits, deductions, and rebates under the tax regime you choose.

As a result, many retirees may end up paying tax at a lower effective rate than they did during their working years.

Last words

Beyond the tax benefits, NPS also offers one of the lowest investment costs in the market, flexibility to change asset allocation, flexibility to change fund managers, and a fully digital experience.

To dismiss NPS solely because a small portion of the retirement corpus is used to purchase an annuity may mean overlooking one of the most important pillars of retirement planning: a guaranteed income stream that complements market-linked wealth creation.