Annuity Terms You Should Know

Table of Content

1. Common Annuity Terms Explained

2. Types of Annuities and Related Terms

3. Understanding the Life Stages of an Annuity: Accumulation vs. Payout Phase

4. Common Features & Optional Rental (Rider) Terms Explained

5. Tax & Regulatory Terms in India

6. Annuity Terminologies Everybody Should Know

7. FAQs on Annuity Terms

In this policy, the investment risks in the investment portfolio is borne by the policyholder

Planning for retirement means more than just saving. It is about making those savings last for life. In this context, annuities can help turn your savings into reliable income, but understanding annuity terms like “annuitant,” “deferred annuity,” and “vesting age” makes your decisions easier and smarter. 

Do you need help choosing the right plan? Then, explore this guide for clear explanations, and connect with an HDFC Life advisor to personalize your annuity plan.

Common Annuity Terms Explained

Understanding the annuity terms and definitions is crucial to making a sound investment for retirement. Here are the key common annuity terms that you must know:

1. Annuitant

The individual who owns the annuity policy is entitled to receive the regular payouts as per the chosen plan.

2. Annuity Due

Annuity payouts are one of the key annuity terms, which mean that the payouts are received at the start of each payment interval, such as monthly or annually, in advance.

3. Accumulation Phase

The period during which the policyholder pays premium amounts to grow the retirement fund gradually before payouts begin.

4. Vesting Age

The pre-defined age at which an annuitant becomes eligible to start receiving periodic income or pension from the annuity plan.

5. Payout Phase

The stage is when the accumulated corpus is converted into regular income, paid out to the annuitant at fixed intervals.

6. Immediate Annuity

A product where a lump sum is invested and regular payouts start immediately, often within one month of purchase.

7. Deferred Annuity

Investment is made upfront, but regular income payouts begin after a defined deferment period or after reaching the vesting age.

8. Surrender Value

The amount payable if the policyholder opts to exit the annuity plan early, subject to the insurer and regulatory norms.

9. Nominee

The person nominated by the annuitant to receive annuity payments or death benefits if the annuitant passes away.

10. Joint Life Annuity

Annuity payouts continue to cover 2 lives (e.g., spouses), and payments stop after both have passed away.

11. Life Annuity

Provides payouts for as long as the annuitant lives. Some options return the purchase price to the nominees after death.

12. Annuity Certain

Guarantees regular payouts for a specific period, regardless of whether the annuitant survives throughout that term.

13. Escalating Annuity

An annuity where the payouts increase at a fixed rate each year, typically to help counter inflation over the payout period.

14. Return of Purchase Price (ROP)

The original investment amount is returned to the nominee after the annuitant’s death, in addition to any payouts made during the annuitant's lifetime.

15. Free-Look Period

A 30 day window post-purchase beginning from the date of receipt of policy document in which the buyer can cancel the annuity and receive a refund, as per norms.

16. Riders^#

Optional add-on benefits that can be included in the annuity plan, such as critical illness or accidental death coverage.

17. Premium

The amount of money paid by the policyholder to buy or maintain an annuity policy, either once or at intervals.

18. Guaranteed Income

The minimum assured income that the insurer promises to pay, regardless of market movements or interest rate changes.

19. TDS (Tax Deducted at Source)

Under the Income Tax Act, 1961¹, regular annuity payouts are taxable. For Indian residents, TDS is not applicable. However, for Non-Resident Indians (NRIs), TDS shall be applicable under Section 195 of Income Tax Act, 1961¹ subject to DTAA benefits. Tax benefit under 80CCC/80CCD(1) ¹

• Section 80CCC Deductions for Pension Contributions

Premiums contributed to pension fund of Life Insurance Companies are eligible for deductions under Section 80CCC1 of the Income Tax Act, 1961, providing deduction upto maximum of Rs 1,50,000. 

i. Deduction under Section 80CCD(1) –

Section 80CCD(1) ¹ allows a deduction for Contributions made to Pension Scheme of Central Government / National Pension Scheme (NPS) by salaried employees or other individuals, subject to the prescribed limit. In addition, Section 80CCD(1B) ¹ provides an extra deduction of ₹50,000 for contributions beyond those covered under Section 80CCD(1). Thus, a taxpayer can claim a total tax benefit of up to ₹2,00,000.

However, you will get a combined deduction of Rs. 1.5 Lakh under sections 80C, 80CCC and 80CCD(1) as specified under Section 80CCE. Such deductions lower your total taxable income during your working years, helping you to save tax.

For tailored advice and plan comparisons, always consult with an expert or a certified insurance advisor, like HDFC Life today! You can also use the HDFC Life annuity calculator to determine the estimated return on investment.

Types of Annuities and Related Terms

The types of annuity plans in India are categorised into 4 major parts. In the following section, we will talk about each type in brief:

1. Fixed Annuity

A fixed annuity is a low-risk product that guarantees returns and provides steady income at a fixed rate. This makes it a dependable choice for retirees or conservative investors who prioritise stability. 

During the accumulation phase, the guaranteed interest rate is locked in, ensuring your investment grows predictably. Many traditional fixed annuities also offer loyalty bonuses or terminal bonuses, which enhance the maturity value. 

For example, HDFC Life’s fixed annuity plans offer lifelong monthly payouts, often with features such as return of purchase price to the nominee.

2. Variable Annuity

Variable annuities are market-linked products in which both returns and payouts fluctuate depending on the performance of selected investment funds. Although this market exposure offers higher earning potential compared to fixed annuities, it comes with increased risk and income variability. 

In India, variable annuities are not very common. Instead, Unit Linked Insurance Plans (ULIPs) are the preferred option for those seeking market-linked growth. 

Variable annuities are well-suited for investors having moderate to high risk tolerance and who aim for capital appreciation over time.

3. Immediate Annuity

Immediate annuities start paying out income almost immediately following a lump-sum payment. These plans are ideal for individuals nearing or entering retirement who require an instant and regular income flow. 

They come with various payout options, including income for life, joint life annuities covering two individuals (such as spouses), and Return of Purchase Price (ROP) options that ensure nominees receive the initial investment. 

A popular product example is HDFC Life New Immediate Annuity, which offers multiple flexible annuity options to match varied retirement needs.

4. Deferred Annuity

Deferred annuities involve an initial accumulation phase, during which the investor contributes money that grows over time, often with tax-deferral benefits. After this phase, the plan enters the payout phase, where regular income starts. 

These annuities are suitable for long-term retirement planning, making them a good choice for younger professionals or those planning ahead. The plans allow flexibility with one-time lump-sum premiums or periodic contributions, helping fund the retirement corpus. 

Examples of deferred annuity products in India include HDFC Life Click 2 Retire and HDFC Life Smart Pension Plus, both of which offer options for fixed or market-linked returns with compounding growth benefits.

Understanding the Life Stages of an Annuity: Accumulation vs. Payout Phase

After understanding the annuity terms, you must learn about the difference between the accumulation phase and the payout phase in an annuity plan. The accumulation phase is the period when the policyholder makes regular or lump-sum premium payments to build their retirement corpus.

On the other hand, the payout phase begins once the insurer starts disbursing the accumulated corpus as periodic income, typically on a monthly or quarterly basis, to the annuitant. 

In the following section, we will highlight the difference between these two annuity stages:

Common Features & Optional Rental (Rider) Terms Explained

Once you have understood the annuity meaning, you must be aware that modern annuity plans in India are designed to offer flexibility, security, and enhanced financial benefits to policyholders. 

Moreover, understanding these key terms will help you make informed decisions when choosing an annuity plan:

1. Riders^#

These are additional benefits or coverage options that you can attach to your base annuity plan. Riders** provide extra protection, which means you do not have to pay future premiums if certain conditions occur, such as critical illness or disability. 

2. Guaranteed Income Rider 

This rider** ensures that you receive a minimum guaranteed income from your annuity plan, regardless of how the underlying funds perform. It offers peace of mind by protecting your cash flow during market downturns or low returns.

3. Cost of Living Adjustment

To help protect your income against inflation, the cost-of-living adjustment feature increases your annuity payouts annually by a predetermined percentage or according to inflation indexes. This ensures your purchasing power remains stable over time, even as prices rise.

4. Enhanced/Impaired Annuity

If you have specific medical conditions or health impairments, this option can provide you with higher annuity payouts than standard rates. Insurer’s factor in reduced life expectancy or health risks to increase your periodic payments, offering better financial support tailored to your health status.

5. Bonus Rate

Some annuity plans offer a bonus rate, which is an additional guaranteed interest rate or payout enhancement based on the insurer’s overall returns. This bonus can boost your annuity income beyond the basic guaranteed amount, making your retirement income more rewarding. 

Tax & Regulatory Terms in India

Understanding the following tax-related annuity terms helps you plan retirement income wisely:

1. Tax-Deferred Growth 

During the accumulation phase, investment gains are not taxed annually, but become taxable on withdrawal or annuitization (converted into income), though commuted pension will get relief under Section 10(10A) while the annuity payouts still remain fully taxable under the head “Income from Other Sources” under the Income Tax Act, 1961 

2. Section  80CCC / 80CCD Tax Benefits

• Section 80CCC Deductions for Pension Contributions

Premiums contributed to pension fund of Life Insurance Companies are eligible for deductions under Section 80CCC(1)¹ of the Income Tax Act, 1961¹, providing deduction upto maximum of Rs 1,50,000. 

 i. Deduction under Section 80CCD(1) –

Section 80CCD(1) ¹ allows a deduction for Contributions made to Pension Scheme of Central Government / National Pension Scheme (NPS) by salaried employees or other individuals, subject to the prescribed limit. In addition, Section 80CCD(1B) provides an extra deduction of ₹50,000 for contributions beyond those covered under Section 80CCD(1). Thus, a taxpayer can claim a total tax benefit of up to ₹2,00,000.

However, you will get a combined deduction of Rs. 1.5 Lakh under sections 80C¹, 80CCC and 80CCD(1) as specified under Section 80CCE. Such deductions lower your total taxable income during your working years, helping you to save tax.

3. Maturity vs. Payout Taxation

Any payment received in commutation of pension as a lump sum on vesting (maturity) is exempt under section 10(10A)(iii) of the Income-tax Act, 1961¹, subject to fulfilment of various conditions under the current income-tax law. Regular annuity received under the annuity plan will be taxable in the hands of the recipient under the head "Income from Other Sources."

4. Standard Deduction 

Under Section 16 of the Income Tax Act 1961¹,  both salaried individuals and pension/annuity recipients can claim a standard deduction of Rs. 50,000(in Old tax regime)/ Rs 75,000(in New Tax regime) or the actual annuity income received, whichever is lower, against their taxable income chargeable under the head “Income from Other Sources”

5. Nominee Benefits 

Upon the death of the annuitant, the nominee may receive a Return of Purchase Price (ROP) or residual amount as per the plan. These payouts are generally considered as capital receipt and hence not taxable in the hands of the nominee, 

Pro Tip: Always evaluate the tax implications of annuity income based on your tax slab, eligibility for deductions, and your retirement cash flow needs.

Summary

Annuities are more than just financial products, as they are tools for lifelong income security. By understanding key annuity terms, such as accumulation phase, deferred annuity, payout frequency, and return of purchase price, you can align your retirement goals with the right product. Moreover, you can opt for annuity plans from HDFC Life as we offer a wide range of options tailored for Indian investors.

FAQs on Annuity Terms

1. What are the terms of an annuity?

An annuity includes terms like accumulation phase, annuitisation, payout frequency, return of purchase price, and nominee benefits. These define how the policy functions and help plan long-term financial security, especially for retirement.

2. What are the key terms of an ordinary annuity?

In an ordinary annuity, payments are made at the end of each period, such as monthly or annually. The key ordinary annuity terms include payment amount, interest rate, duration, and payout start date. It is commonly used for retirement income, offering predictable cash flows after the accumulation period. 

3. Do you pay tax on annuity income?

Yes, annuity payouts are fully taxable as per your income tax slab under “Income from Salary” or “Income from Other Sources.” However, under Section 16 of the Income Tax Act, 1961¹, you can claim a standard deduction of Rs. 50,000(in Old tax regime)/ Rs. 75,000 (in Nex tax regime) or the actual annuity income received, whichever is lower, if the annuity is chargeable under the head “Income from Salary”. 

Note: If assessee has opted for Old tax regime, assessee shall be eligible to claim deduction under chapter VI-A (like Section 80C, 80D, 80CCC, etc). If assessee opted for New tax regime only few deductions under Chapter VI-A such as 80JJAA, 80CCD(2), 80CCH(2) are available.

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