As India prepares for Budget 2026, retirement planning has quietly and steadily moved higher on the list of priorities for both policymakers and savers. One area gaining increased attention is the taxation of annuities, which for many retirees remains a consistent, though modest, source of post-work income.
With about 160 million people aged 60 and older, India is home to the second-largest elderly population in the world. This number is likely to increase to 230 million in 2036, about 15% of the total population, according to government estimates. Add to this the fact that the average life expectancy in India has increased about 14 years between 1990 and 2025.
This vast ageing population underlines the burgeoning pension and annuity market in India. An annuity caters to the key dilemma of a pensioner, for a life-long pension at a steady, guaranteed rate and exposes the investors to a reinvestment rate risk, especially in a volatile interest rate scenario.
“Annuities are the only solution, which provide complete protection from the perspective of living longer (i.e. outliving one’s corpus), by providing a regular flow of income throughout one’s lifetime.
Currently, an annuity is completely taxed in the hands of the customer. Hence, a tax break on annuity could further encourage Indians to opt for these instruments, providing the much-needed social security to many during their golden years. Further, this will help insurance companies invest in long-rated bonds and channelise long-term savings into capital-intensive sectors,” said Deputy CEO and ED, Edelweiss Life Insurance.
It is pertinent to note that India’s insurance sector has made steady progress, but penetration and coverage gaps remain significant, particularly in retirement planning and rural protection.
Managing Director and Chief Executive Officer, Bajaj Life Insurance, said, “Aligning the tax treatment of insurance annuities with other pension instruments, such as taxing only the returns on annuity payouts and extending comparable deductions, would allow individuals to choose retirement products based on suitability rather than tax differences. Similarly, bringing parity in taxation between traditional and unit-linked life insurance policies can simplify the tax framework and encourage disciplined, long-term wealth creation alongside protection.”
While the Indian government has already implemented several progressive reforms in recent years to sustain domestic demand and support its growth trajectory, analysts say the upcoming budget now presents an opportunity to shift focus towards long-term household financial security, particularly by easing the tax burden on retirement income and encouraging wider adoption of pension and annuity products.
Among its key reforms are the introduction of GST 2.0. and allowance of 100% FDI in insurance. As a part of GST 2.0 reforms, the government announced 0% GST on individual insurance products, signalling that insurance is an essential instrument.
He said, “The GST 2.0 measure has provided a fillip to the insurance sector, as evidenced in the November and December growth numbers. 100% FDI has also bolstered the market sentiment and improved the outlook for the sector. In the upcoming Union Budget FY 2026 – 2027, we expect a continuation in government’s efforts to bring ease of business, boost capital inflow into the Indian economy, and further the agenda of Insurance for All 2047.”
