What are the Different Types of Annuities?

What is an Annuity?

An annuity is a financial product that provides regular payments in return for a lump sum investment or periodic contributions. It is commonly used as a source of income during retirement. In an annuity plan, the investor receives fixed or variable payments over a specific period or for their lifetime. 

In India, various types of annuities are available, offering individuals a dependable income post-retirement, suiting their specific needs. Learn more about them in the next section.

Types of Annuities in India

Listed below are the key types of annuities being offered in India:

1. Immediate Annuity

   An immediate annuity provides a guaranteed stream of income right after the lump sum premium is paid. Typically, these plans start payouts within a month and are ideal for those nearing retirement. You can opt for monthly, quarterly, half-yearly, or yearly payouts. Some plans also allow customization, such as adding a spouse or including money-back features. The payouts can be fixed, inflation-adjusted, or linked to market performance.

2. Deferred Annuity

   With deferred annuities, you invest over a period, and the insurer starts providing regular payments at a predetermined future date. During the accumulation period, your invested funds grow, offering potentially better returns than immediate annuities. These plans are suitable for those who don’t need immediate income and can afford to let their funds grow. They may offer guaranteed returns or higher potential returns with some risks.

3. Fixed Annuity

   A fixed annuity guarantees a specific payout for a defined period or for life. It is ideal for risk-averse individuals, as the premium is invested in low-risk instruments like Treasury Bills and bonds. Fixed annuities provide consistent income, making them ideal for retirees seeking a reliable source of income. The payout can be either fixed or inflation-adjusted, ensuring a stable income in retirement.

4. Variable Annuity

   Variable annuities invest your premiums in market-linked assets like stocks or mutual funds. As the returns depend on the performance of these assets, they can be higher but also unpredictable. These annuities are suited for experienced investors who are comfortable with the risks of market fluctuations. They also offer the flexibility to choose between immediate or deferred payouts and various maturity periods.

5. Lump-sum Annuity

   While most annuities provide regular payouts, some offer the option of a lump sum payout. This choice is typically available only at specified periods. However, opting for a lump sum may result in missing out on regular retirement benefits.

How Do Different Types of Annuities Work?

Let us learn about the working of different types of annuities in India:

1. Life Annuity

   • You invest a lump sum amount in the life annuity plan.

   • The insurer calculates the monthly payout based on your age and the terms of the policy.

   • Regular payouts are made to you for the rest of your life.

   • Payments stop only upon your death, providing a lifetime income stream.

2. Joint Life Annuity

   • You purchase the annuity and include your spouse as the joint annuitant.

   • Monthly payouts are made to you for as long as you live.

   • If you pass away, the spouse continues to receive the same income for their lifetime.

   • The joint life annuity ensures both partners are financially supported for life.

3. Life Annuity with Refund of Purchase Price

   • You invest in the annuity, and regular payouts are made for life.

   • If you pass away before receiving the full purchase amount in payouts, the balance is refunded.

   • The nominee receives the remaining amount as a lump sum.

   • This plan guarantees that the initial investment is not lost, even if you die early.

4. Joint Life Annuity with Return of Purchase Price

   • You invest a lump sum amount and include your spouse as the joint annuitant.

   • Regular payments are made to you and your spouse for life.

   • If either you or your spouse passes away, the surviving partner continues to receive payouts for the remainder of their life.

   • Upon the death of both annuitants, the initial purchase amount is refunded to the nominee.

   • This plan ensures lifetime income for both partners, with the added benefit of returning the initial investment if both pass away early.

5. Annuity Paid for a Fixed Term

   • You select a fixed period (e.g., 10, 20, or 30 years) during which you’ll receive payments.

   • The insurer calculates the monthly payout based on the selected term.

   • You receive regular payouts for the full term of the plan.

   • After the term ends, the annuity stops, and no further payments are made.

6. Inflation-Indexed Annuity

   • You purchase the annuity by investing a lump sum amount.

   • The insurer calculates the monthly payout based on your age and the terms of the policy, with an inflation adjustment clause.

   • The payouts are periodically adjusted for inflation, helping maintain the purchasing power of your income over time.

   • Regular payouts are made, with the amount increasing in line with inflation, providing better financial security in the long run.

   • This type of annuity is designed to protect your income from the erosion caused by rising living costs.

Advantages and Disadvantages of Different Types of Annuities

The key pros and cons of different categories of annuity plans are listed below:

Tax Calculations on Annuity in India in 2025

• Annuity Taxation: Annuity income is taxable under Income from Other Sources.

• Taxable Income: The annuity income you receive is considered part of your total income and is taxed according to your income tax slab.

• Tax Deduction at Source (TDS): TDS at the rate of 10% is deducted if the annuity income exceeds ₹2.5 lakh per year.

• Tax on Purchase Price: No tax on the initial annuity purchase amount (investment).

Income Tax Slabs for Annuity Plans for FY 2025-26: 

• Standard Deduction: For the Financial Year 2025-26, a standard deduction of up to ₹50,000 (Old regime) or ₹75,000 (New regime) can be claimed.

• Income Tax Slab Rates for FY 2025-26: Following will be the income tax slab rates for the annuity income at different retirement age-

  Old Tax Regime for FY 2025-26 (AY 2026-27)				New Tax Regime for FY 2025-26 (AY 2026-27)
  Income Slab (in Rs.)	General Citizen	Senior Citizen (60-80 years)	Super Senior Citizen (≥80 years)	Tax Slab for FY 2025-26	Tax Slab
  ₹0 - ₹2,50,000	No Tax	No Tax	No Tax	0 - ₹4,00,000	No Tax
  ₹2,50,001 - ₹3,00,000	5%	No Tax	No Tax	₹4,00,001 - ₹8,00,000	5%
  ₹3,00,000 - ₹5,00,000	5%	5%	No Tax	₹8,00,001 - ₹12,00,000	10%
  ₹5,00,001 - ₹10,00,000	20%	20%	20%	₹12,00,001 - ₹16,00,000	15%
  Above ₹10,00,000	30%	30%	30%	₹16,00,001 - ₹20,00,000	20%
  –	–	–	–	₹20,00,001 - ₹24,00,000	25%
  –	–	–	–	₹24,00,001 and Above	30%

• Tax benefits on certain annuity plans under Old Tax Regime:

  • Section 80C: Deductions up to ₹1.5 lakh in Section 80C for investments in specified areas like NPS and life insurance.

  • Section 80CCC: Deductions for contributions to certain pension plans and annuity plans.

  • Section 80CCD(1): Additional deductions for specific pension plans.

  • Total deductions across Section 80C, 80CCC, and Section 80CCD(1) cannot exceed ₹1.5 lakh per year.

Best Tips for Choosing an Annuity Plan

When it comes to buying an annuity, listed below are some important considerations that should not be overlooked by an individual on the premise of the circumstances:

1. Annuity Payout Duration: 

   When choosing an annuity plan, it is important to decide on the payout duration based on your financial goals. You can select either a lifetime or fixed term payout. A lifetime payout ensures continuous income for as long as you live, while a fixed-term payout provides income for a specific period.

   If you prefer higher monthly payments, a shorter payout duration is ideal, but keep in mind that the payments will stop at some point. This could be beneficial if you need additional income, for instance, during the later years of paying off a mortgage. However, a shorter duration could leave you without funds if you outlive the term. Consider your long-term needs carefully.

2. Cover for the Spouse: 

   For those wanting to secure their spouse’s financial future, opting for a joint life annuity or spouse cover is a wise choice. This ensures that your spouse will continue receiving the annuity payout after your death. The payment amount may be lower, but it offers financial security for both partners.

   This option is particularly beneficial if you or your spouse lack sufficient retirement savings. By selecting this option, you guarantee that your spouse will have income for life, providing peace of mind for both.

Case Study on Different Types of Annuities in India

With the following examples let us understand the types of annuities more closely:

Is Annuity the Right Investment Option for You?

Consider the following factors to decide if an annuity plan is right option for you:

• Guaranteed Income: Annuities offer a guaranteed income for life, making them a good choice for securing financial stability after retirement.

• Low-Risk: They are a low-risk investment, as the insurance company assumes the investment risks.

• Long-Term Focus: Annuities are a long-term investment, so they may not be ideal for short-term financial goals.

• Tax Advantages: Certain annuities provide tax benefits, which can help with long-term tax planning.

• Customizable Options: You can choose from different types of annuities, such as immediate, deferred, fixed, or variable, depending on your needs.

• Inflation Risk: Fixed annuities may not keep up with inflation, which could reduce your purchasing power over time.

• Fees and Costs: Annuities often come with high fees, so it's important to understand all the costs involved before investing.

Conclusion

Understanding the different types of annuities can help you choose the right plan based on your financial goals. Whether you prefer the guaranteed income of immediate annuities or the long-term benefits of deferred annuities, each type offers unique advantages. By carefully evaluating your needs and considering factors like payout structure and investment horizon, you can make an informed decision.