What is an Annuity? Types, Taxation and Calculation – All you need to know

Retirement planning is critical for building a significant financial corpus that can help live a stress-free life after retirement. In order to build funds for post-retirement life, many people prefer annuities. An annuity plan is a product that allows the policyholders to receive payouts from the corpus that is built during the tenure. By buying an annuity, a person can secure his/her life after retirement.

Types of Annuity

  • Immediate Annuity

In case of an immediate annuity, the premium is paid in a lump sum. The policyholder will start receiving the payouts immediately after the premium is paid.

  • Deferred Annuity

In a deferred annuity, an individual is required to build a corpus. During the accumulation phase, the individual is required to make premium payments. Once the accumulation phase ends, the accrued amount is used to purchase annuities that provide future payouts to the policyholders.

  • Lump Sum Annuity

In this annuity, the policyholder can get a lump sum payout. The individual can withdraw the amount after a specific time. However, in such schemes, individuals usually don’t have the option of a 100% withdrawal and a fixed amount of the funds must be kept in place.

  • Periodic Annuity

In case of periodic annuity, the individual can get regular payouts. The frequency of payouts can be set at regular intervals.

  • Fixed Annuity

This type of annuity provides fixed monthly pensions to the individual. The corpus is invested in fixed income instruments. Hence, it stays safe.

  • Variable Annuity

In case of the variable annuity, the corpus is invested in market-linked options. Thus, the amount of payout can change based on the market performance.

Annuity Taxation

Annuities are treated as monthly salary. Therefore, they are taxed as per the tax slabs. Here is the taxation on annuity-

Income Tax Slab- Up to Rs. 3 Lakhs

  • Tax Rate for Senior Citizens (Between 60 to 80 Years of Age)

Nil

  • Tax Rate for Super Senior Citizens (Above 80 Years of Age)

Nil

Income Tax Slab- Between Rs. 3 Lakhs and Rs. 5 Lakhs

  • Tax Rate for Senior Citizens

10% on the amount that exceeds Rs. 3 Lakhs

  • Tax Rate for Super Senior Citizens

Nil

Income Tax Slab- Between Rs. 5 Lakhs and Rs. 10 Lakhs

  • Tax Rate for Senior Citizens

Rs. 20,000+20% on income that exceeds Rs. 5 Lakhs

  • Tax Rate for Super Senior Citizens

20% on income that exceeds Rs. 5 Lakhs

Income Tax Slab- Above Rs. 10 Lakhs

  • Tax Rate for Senior Citizens

Rs. 1.2 Lakh+30% on income that exceeds Rs. 10 Lakhs

  • Tax Rate for Super Senior Citizens

Rs. 1 Lakh+30% on income that exceeds Rs. 10 Lakhs

Annuity Calculation

There are various factors to consider while calculating the annuity-

  • Income Information

Income generated from all the sources is considered while calculating annuity.

  • Demographic Information

Consider basic information like the current age and the expected age of retirement.

  • Inflation

The rate of inflation is also an important factor to consider while calculating annuity.

  • Rate of Returns

The rate of returns depends on the type of investment vehicle chosen by the individual. It can be variable or fixed.

  • Current Savings and Expenses

It is also important to consider current savings and expenses while calculating annuity.

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