Annuity

The distinction that matters to HR is between a scheme that pays a pension itself and one that requires an annuity to be bought. The first is administered under its own rules; the second involves the employee choosing a provider and an option at exit, and choosing badly is irreversible.

An annuity rate is fixed when the contract is bought, for the life of the contract. There is no revision later, and the option chosen cannot generally be changed.

• Life annuity. The highest monthly amount, ceasing on death, with nothing to the estate.
• Life annuity with return of purchase price. A lower monthly amount, with the original corpus returned to the nominee on death.
• Joint life annuity. Continues to the spouse after the annuitant's death, usually at the same or a reduced rate, and buys a lower amount initially.
• Annuity for a guaranteed period. Pays for a minimum number of years regardless of death, then for life.
• Increasing annuity. Starts lower and rises by a fixed percentage each year, which addresses the fact that a level annuity loses purchasing power every year of a long retirement.

Two practical points are worth telling employees, without advising them. The difference between options is far larger than the difference between providers, so the choice deserves more attention than the comparison shopping. And a level annuity bought at fifty-eight has to last thirty years, during which inflation does the work that no provider comparison will undo.

The tax treatment of the corpus and the tax treatment of the income are separate questions, and employees routinely assume the first answers the second.

• Annuity payments are taxable in the hands of the recipient in the year of receipt, generally as salary or as income from other sources depending on the source of the annuity.
• The lump sum withdrawn at exit from the National Pension System is subject to its own exemption limits and conditions, which are separate from the treatment of the annuity income that follows.
• Commutation of pension has its own treatment, which differs between government and non-government employees.
• Where a superannuation fund is approved, contributions, accretions and payments each have their own treatment and limits, and an employer contribution above the prescribed aggregate ceiling across recognised funds is taxable as a perquisite in the employee's hands in the year of contribution.
• The rates, ceilings and exemption limits are set by the Finance Act and change. Do not carry a figure forward from last year's note.

Verify the current exemption limits, the annuitisation proportion, the commutation treatment and the aggregate employer contribution ceiling against the Income-tax Act, 2025 as amended by the current Finance Act, and the applicable pension regulator circulars, before telling an employee anything specific.

Commutation is the part with recorded detail, and it turns on who the employer was. The section 19(1) salary deduction table of the Income-tax Act, 2025 deals with it at three serial numbers. Serial number 7 allows the entire commuted amount where the commutation is under the Civil Pensions (Commutation) Rules or a similar scheme for civil, all-India, defence, State or local authority service. Serial number 8 covers any other employer, and allows the commuted value of one-third of the pension where gratuity was also received, and one-half in any other case. Serial number 9 allows the entire amount where it comes from a fund specified at serial number 3 of the Schedule VII table. So a private-sector retiree who also took gratuity is looking at the one-third limb, which is the case employees most often assume is the one-half.

What this entry does not state is the treatment of the National Pension System lump sum, or the proportion of the corpus that must be annuitised at exit. Those sit in the pension regulator's legislation and schemes, which are not recorded in this site's source registry and have not been read. Section 19 is absent from the Finance Act, 2026 amended-section list, so the commutation entries above stand as enacted; the same cannot be said for anything not stated here.

HR is not a financial adviser, and the useful contribution is administrative rather than advisory.

• Give the employee their scheme details in time. Exit paperwork for the National Pension System and for a superannuation fund takes weeks, and starting it in the final month leaves a retiring employee with a gap in income.
• Confirm the nomination position before exit. A nomination that is out of date, or was never made in the prescribed form, is discovered by the family at the worst possible time.
• Ensure identifiers and bank details are current and match across records, since a mismatch between the scheme record and the bank account is the most common cause of a delayed first payment.
• Coordinate with the trustees where a superannuation fund is involved. The employer is not the fund, and the fund rules govern what can be commuted and what must be annuitised.
• Give information, not recommendations. Providing a comparison of options is helpful; steering an employee towards a provider is not a role the employer should take on.
• Handle the gratuity and provident fund settlement on its own timeline rather than bundling it into the annuity process, since those are separate entitlements with their own deadlines.