India lets a property seller keep up to ₹50 lakh of capital gains tax-free for locking the money into five-year bonds. It taxes a retiree at full slab rates for life for lending the government money over 30 years. Two former LIC executives want that reversed.
Writing in Business Line on 20 August 2026, Kumar, a former managing director of LIC, and Sudhakar, a former executive director (marketing), argue that annuity income should be tax-free up to a limit. They write in a personal capacity.
The bond comparison
Their starting point is Section 85 of the Income-Tax Act, 2025. A seller with a large capital gain pays nothing on up to ₹50 lakh if the money goes into five-year infrastructure bonds from state entities such as REC, PFC, HUDCO or IRFC. A decade ago the government ran the same play with tax-free infrastructure bonds under Section 10(15)(iv)(h), to draw retail savings toward highways and railways. The authors say it worked.
An annuity buyer does something similar for far longer. Insurance regulator IRDAI sets an investment pattern that sends most of the corpus into government securities and State Development Loans, in practice well above the statutory minimum. In the authors’ words, the buyer’s legal asset is an insurance contract, but “the economic reality is a 30-year loan to the Government of India”.
The GST Council went part of the way on 22 September 2025, when it exempted individual life insurance and annuity premiums from the 18 per cent tax. The payout is still taxed.
Why annuities get left out
Annuities, the authors say, are the one product that covers longevity risk. Mutual fund withdrawal plans, equity portfolios and fixed deposits leave a retiree exposed to market swings and to running out of capital. Through mortality pooling, an insurer guarantees income for as long as the annuitant lives.
Yet in pre-retirement programmes at government offices, public sector undertakings and large corporates, the talk is about the Senior Citizen Savings Scheme, with its ₹30 lakh ceiling and quarterly payout at 8.2 per cent. The authors give reasons. A chartered accountant is paid to cut tax, and a lifetime slab-taxed annuity works against that. Fee-based advisors lose assets under management once a corpus is annuitised. Nobody in the chain has a reason to push the product.
Outside the NPS the tax is worse, they argue. The purchase money was already taxed, and Indian law, unlike the American “Exclusion Ratio” system, does not separate returned capital from yield. Part of each taxed payment is the buyer’s own money coming back.
The proposal
Parliament should exclude annual annuity income up to ₹12 lakh from total income for regulated lifetime products of IRDAI-registered insurers, the authors write, with a flat 10 per cent final withholding tax on anything above. The figure matches the level up to which a resident individual already pays no tax under the default regime. Unlike the current rebate, which vanishes once income passes the threshold, an exclusion would shield the retirement baseline whatever else the person earns.
Only lifetime variants bought at or after superannuation, returning the purchase price to nominees on death, would qualify. That keeps out disguised tax-free bonds, deferred accumulation products and surrender-heavy wealth plans. Insurers would report every exempt payout against PAN.
The authors admit direct revenue would fall at first. They estimate a bigger retail annuity market could send ₹40,000-50,000 crore a year into long-dated central securities and State Development Loans. At a 50-basis-point borrowing advantage for the government, the interest savings would build on a growing stock of debt. They also expect lower welfare spending later, though they concede it would not show up in budget accounts.
They list conditions first. IRDAI should mandate inflation-linked annuities, tighten distributor controls and set standard yield disclosures, while PFRDA builds a rate comparison platform. Withholding rules must change too, because an exemption that leaves tax deducted at source to be reclaimed a year later “creates friction no distributor can overcome”.
