Annuity

What is an annuity?

An annuity is a life insurance product that pays the buyer, called the annuitant, a fixed income at regular intervals, monthly, quarterly, half-yearly or yearly, for life or for an agreed period. The buyer pays a lump sum (the purchase price) or a series of premiums, and the insurer takes on the risk that the annuitant lives longer than expected. That longevity risk is what separates an annuity from a fixed deposit or a systematic withdrawal plan, which can run out.

In an immediate annuity, payments start soon after the purchase price is paid. In a deferred annuity, the buyer pays now and income starts after a deferment period of some years.

How annuities work in India

Annuities are offered only by life insurers, under the IRDAI (Insurance Products) Regulations, 2024 and the Master Circular on Life Insurance Products of June 2024. As of October 2026:

• Product form. Annuities are non-linked, non-participating products, sold to individuals or groups. The underlying annuity must be guaranteed for life once it starts.
• Required options. Every annuity product must offer at least a life annuity and a life annuity with return of purchase price on death.
• Other permitted options. Annuity certain for a fixed period and life thereafter; joint life annuities paying 100%, 50% or another share to the secondary annuitant, with or without return of purchase price; and a variable annuity linked to a public benchmark.
• Variable annuity floor. In the variable pay-out option, the guaranteed minimum rate can never fall below 60% of the inception rate. If a 60-year-old's rate at purchase is 7% a year, the floor is 4.2%.
• Minimum size. An annuity must be at least ₹1,000 a month, except under government schemes and the National Pension System, which follow their own rules.
• Surrender and loans. Immediate annuities do not acquire a guaranteed surrender value; deferred annuities do. Insurers may offer a policy loan against the eligible surrender value of an annuity with return of purchase price.
• Health rider. An insurer may attach a rider covering health events, with an explicit premium.

Common annuity options compared

Where annuities come from

Most annuity business arises from retirement savings that must or may be converted into income:

• Pension plans from insurers. On vesting, a policyholder can commute up to 60% of the proceeds and must use the rest to buy an annuity, and can buy up to 50% of the amount net of commutation from another insurer. See pension plan.
• National Pension System. NPS subscribers buy annuities at exit from life insurers empanelled by PFRDA. Under PFRDA amendments notified in December 2025, the minimum share of the corpus to be annuitised at normal exit fell from 40% to 20% for All Citizen and corporate subscribers, while government sector subscribers remain at 40%.
• Direct purchase. Retirees buy immediate annuities with gratuity, provident fund or other savings.

Annuity income is taxed as income in the year it is received.

What annuities mean for distribution

Annuities are large-ticket, single-premium, irreversible decisions, which makes advice quality more important than in almost any other life product.

• Irreversibility. Once an immediate life annuity starts, the purchase price usually cannot be taken back. The adviser must make sure the customer keeps an emergency fund outside the annuity.
• Choice of option. The gap between a life annuity and a return of purchase price annuity is large. A customer with no dependants and a need for maximum income may prefer the first; a customer who wants to leave the capital to children may prefer the second. Joint life cover for a spouse is often the most important choice and the one most often skipped.
• Rate comparison. Annuity rates differ between insurers and change with interest rates. The open market option in pension plans, and NPS's choice among empanelled providers, mean customers can and should compare quotes. Partners that show a comparison build trust.
• Inflation. A level annuity loses purchasing power. The adviser should show what ₹50,000 a month buys in 15 years and discuss increasing or variable options, or keeping part of the corpus invested.
• Economics for the channel. As a single premium product, annuity business falls under the single premium limits of the IRDAI (Expenses of Management, including Commission, of Insurers) Regulations, 2024, so commission as a share of premium is low. IRDAI's September 2026 consultation paper proposes very low caps on single premium savings business; as of October 2026 these are proposals.
• The NPS change. A smaller compulsory annuity share under NPS reduces one source of annuity volume for insurers, and makes the voluntary annuity conversation with retiring subscribers more important.