Annuity Plans — Immediate vs Deferred, Types of Annuity Options
What an annuity is, how immediate and deferred annuities differ, the main annuity options and what each pays, what moves an annuity rate, and how annuity income is regulated and taxed.
What an annuity is
An annuity is a contract in which a life insurer, in return for a lump sum (called the purchase price) or a series of premiums, pays a regular income for life or for a fixed period. The person who receives the income is the annuitant.
Life insurance and an annuity deal with opposite risks. Life cover pays when a person dies during the term; an annuity keeps paying for as long as the annuitant lives, so it addresses longevity risk, the risk of outliving one's savings.
Immediate and deferred
In an immediate annuity the annuitant pays the purchase price in one lump sum and the income starts within one year, at the end of the first payment period chosen: a month, a quarter, a half-year or a year.
In a deferred annuity the income starts later, after an accumulation period in which the money is built up. An insurer's pension plan works this way: the corpus grows during the working years and is turned into income at vesting. Part of the money leaving the National Pension System at exit is also turned into income by buying an annuity from a life insurer acting as an Annuity Service Provider.
The annuity options
A life annuity pays until the annuitant dies and then stops; nothing is returned. A joint-life annuity continues to the spouse after the annuitant's death. An annuity certain is paid for a fixed term rather than for life. A life annuity with return of purchase price pays for life and, on death, returns the purchase price to the nominee.
The option decides how much income the same purchase price buys. A life annuity with return of purchase price carries a lower annuity rate than a plain life annuity, because the insurer must hand back the capital as well as pay the income. The exact terms of each option, such as the share that continues to a spouse, are set out in the product.
What moves the annuity rate
The annuity rate is the yearly income the insurer offers for a given purchase price. For a life annuity it rises with the age of the annuitant at purchase: the older the person, the shorter the expected payout period, so the same purchase price buys a higher yearly income.
IRDAI does not fix annuity rates. They differ by insurer, by annuity option and over time, so no single figure can be treated as the rate a buyer will get.
Rules and tax
Annuities are governed by the IRDAI (Insurance Products) Regulations, 2024, which replaced the 2019 product regulations from 1 April 2024, and by IRDAI's Master Circular on Life Insurance Products of 12 June 2024.
Annuity income is fully taxable: each instalment is income of the person who receives it, in the year it is received.
Rules at a glance
One purchase price, three choices
Illustration: Ramesh, 61, has just retired and is looking at an immediate annuity. He pays the purchase price on 1 April and chooses quarterly payments, so his first instalment falls due at the end of the first quarter, about three months later.
He is weighing three options. A plain life annuity would pay for his lifetime only and leave nothing when he dies. A joint-life annuity would keep the income going to his wife, Sunita, after him. A life annuity with return of purchase price would pay him a lower income than the plain life annuity, and the purchase price would go to his nominee on his death. Which option fits depends on his own circumstances; the trade-off between income now and money left behind is the same for every buyer.
Key points
- An annuity turns a lump sum or a series of premiums into regular income for life or for a fixed period.
- An immediate annuity starts paying within one year of purchase; a deferred annuity starts after an accumulation period.
- The four common options are life annuity, joint-life annuity, annuity certain and life annuity with return of purchase price.
- Returning the purchase price to the nominee lowers the annuity rate compared with a plain life annuity.
- For a life annuity, the rate rises with the annuitant's age at purchase; IRDAI does not fix annuity rates.
- Annuity income is fully taxable.
Common misunderstandings
- An immediate annuity does not have to start paying the very next day: the income starts within one year, at the end of the first payment period chosen.
- Annuity rates are not set by IRDAI or the government: each insurer sets its own, and they change over time.
- Annuity income is not tax-free because it comes from a retirement product: it is fully taxable.
Questions people ask
Which option pays the nominee after the annuitant's death?
The life annuity with return of purchase price: it pays income for life and returns the purchase price to the nominee on death.
Why does a 70-year-old get a higher annuity rate than a 60-year-old for the same purchase price?
Under a life annuity the insurer expects to pay the older person for fewer years, so the same amount can be spread over a shorter period.
Is the pension from an annuity taxed?
Yes. Annuity income is fully taxable in the hands of the person who receives it.
What this lesson relies on
- IRDAI (Insurance Products) Regulations, 2024
- IRDAI Master Circular on Life Insurance Products (12 June 2024)
- Income-tax Act, 2025 — annuity income is taxable in the hands of the recipient
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.