An annuity is a contract with an insurer. You pay a lump sum. The insurer pays you a pension for life, or for a term, on the option you chose. The rate depends on your age and that option. It is not the same as the return your NPS fund earned before retirement. One number is how the corpus grew. The other is the price of turning a slice of it into a pension.
At a normal NPS exit the PFRDA rules require at least 20% of the corpus to buy an annuity when the corpus is above ₹8,00,000, and up to 80% can be taken as a lump sum. There are simpler cash options when the corpus is small, including a full lump sum at or below ₹8,00,000, and a mid band up to ₹12 lakh that can use a six-year redemption instead. The NPS calculator models the annuity choice. It does not model that six-year redemption.
Tax sits in two places. Buying the annuity is not itself treated as money received that year. Section 124(9) says so. The pension is taxed when it is paid, at your slab. Schedule II (this was section 10(12A)) leaves out a lump sum only up to 60% of the corpus. An 80% lump sum does not make the extra 20% exempt. People sometimes raise the lump sum to the PFRDA maximum and then discover the tax line.
The annuity rate in the calculator is a planning input. An insurer’s quote, on the day you exit, is the number that will actually be paid. Shopping that quote matters more than tweaking the planning rate a decade early, but the planning rate is still how you see the shape of the pension.
A worked example
Start with ₹5,000 a month at age 30, a planning return of 10%, and put 40% of the corpus into an annuity at 6%. The corpus is ₹1,13,96,627. The annuity purchase is ₹45,58,651. The monthly pension the engine prints is ₹22,793.
The lump sum is ₹68,37,976, and the tax-free part is ₹68,37,976. Because 40% was used for the annuity, the lump sum sits on the 60% line and the taxable lump sum is ₹0. Lower the annuity share toward 20% and the lump sum grows. Part of that growth can fall outside Schedule II. The NPS calculator shows the split. The NPS guide explains why the pension is the taxed piece.
Mistakes people make
- Using the fund’s 10% as if it were the pension rate.
- Assuming the annuity purchase is taxed as a withdrawal. Section 124(9) says it is not received that year.
- Taking 80% in cash and expecting Schedule II to cover all of it.
- Forgetting that the pension is taxed every year it is paid, at whatever slab you are in then.
- Modelling the six-year redemption as if it were this annuity. The calculator does not.
The section
Section 124(9) is the purchase (it is not treated as received). Section 124(6) taxes the pension when it is paid, and taxes a lump sum that Schedule II did not exclude. Schedule II (this was section 10(12A)) caps the exempt lump sum at 60% of the corpus.
Questions
Is the annuity rate the same as my NPS return?
No. The fund return and the insurer’s pension rate are different. The calculator’s planning return is 10% and its planning annuity rate is 6%. An insurer’s quote is the number that will actually be paid.
Is buying the annuity taxed that year?
Section 124(9) does not treat the purchase itself as money received that year. In the example, ₹45,58,651 goes to the insurer. The pension of ₹22,793 a month is taxed when it is paid.
Can I skip the annuity if the corpus is small?
If the corpus is ₹8,00,000 or less, a non-government subscriber can take the whole amount in cash. Above that, at least 20% buys an annuity on the path this calculator models.
Sources
Figures checked 28 Oct 2026.