Annuity
A contract that converts a lump sum into a guaranteed income stream.
Annuity income is fully taxable at slab rates and rates are locked at purchase. At least 40% of an NPS Tier I corpus must buy an annuity at exit.
Why Annuity matters when comparing products
Understanding annuities is crucial for financial planning, especially for retirement income in India. They convert a lump sum into a regular, guaranteed income stream, addressing longevity risk. The taxability of this income at slab rates and the requirement for NPS Tier I corpus to be annuitised are key considerations when comparing long-term savings and investment products, impacting net returns and liquidity in retirement.
Illustrative example
Suppose an individual invests ₹10,00,000 into an annuity plan. This investment might generate a guaranteed annual income of ₹60,000 for life. If their tax slab is 10%, they would pay ₹6,000 in income tax on this annuity, receiving ₹54,000 net annually. This illustrates the conversion of a lump sum into a taxable income stream.