There is a fundamental paradox sitting at the heart of India’s public finance framework: the Union Government eagerly waives income taxes for investors who lend it money for five years, yet levies lifetime slab-rate taxes on retirees who lend it money for thirty.Consider the mechanics of Section 85 of the Income-Tax Act, 2025. A property seller who earns a massive capital gain can walk away completely tax-free up to ₹50 lakh — provided they lock that money into five-year infrastructure bonds issued by state entities like REC, PFC, HUDCO, or IRFC. It is a calculated, mutually beneficial exchange: the sovereign forfeits short-term direct tax revenue to secure low-cost, directed capital for national buildouts. A decade ago, the government deployed the exact same playbook with tax-free infrastructure bonds under Section 10(15)(iv)(h) to pull retail savings directly into highways and railways. The trade worked brilliantly.Yet, when an Indian retiree converts his/her life savings into an annuity — delivering long-duration, 20-to-30-year institutional capital straight into government securities — the sovereign responds not with tax relief, but with lifelong, slab-rate taxation. India has left a crucial economic trade half-made.On September 22, 2025, the GST Council took a commendable first step by completely exempting individual life insurance and annuity premiums from the 18 per cent Goods and Services Tax. But the heavy lifting remains undone: resolving the direct income tax levied on the periodic annuity payout itself.Where the corpus goes: The economic realityUnder the National Pension System (NPS), contributions accumulate in market-linked funds, growing tax-free. At retirement, up to 60 per cent of the corpus is withdrawn tax-free and the balance purchases an annuity from a PFRDA-empanelled service provider, exempt at the point of purchase. Both exemptions carry into the Income-Tax Act, 2025. The PFRDA amendment regulations notified in December 2025 then cut mandatory annuitisation for non-government subscribers on a normal exit from 40 per cent to 20 per cent, and removed it entirely for a corpus of ₹8 lakh or less. However, because the lump-sum exemption still stops at 60 per cent, the additional 20 per cent now withdrawable is taxed at slab rates. The tax code has stopped keeping pace with pension regulation.Once the corpus reaches the insurer, the Insurance Regulatory and Development Authority of India (IRDAI) prescribes a strict pattern of investment that drives the bulk of it back into government securities (G-Secs) and State Development Loans (SDLs) — in practice, far above the statutory minimum floor. The buyer’s legal asset is an insurance contract; the economic reality is a 30-year loan to the Government of India, with the insurer acting as an intermediary. The tax-free bond investor earns a tax-exempt return on short-term state-directed financing; the annuity buyer funds government debt of vastly longer duration and is taxed at full slab rates. Same public purpose. Same ultimate sovereign beneficiary. Radically different tax treatment.The longevity risk imperativeBeyond tax mechanics, the annuity answers a structural macroeconomic risk that no other asset class addresses. As India’s demographic profile shifts towards an ageing population, household financial fragility in old age poses a growing social security threat. Mutual fund Systematic Withdrawal Plans (SWPs), equity portfolios, and fixed deposits subject the retiree to market volatility, reinvestment rate risk, and exhaustion of capital.The annuity alone transfers this longevity risk to a regulated financial institution. Mortality pooling is what makes this promise possible. Only the annuity guarantees predictable income for as long as the annuitant lives.Yet, in pre-retirement programmes in government offices, public sector undertakings, and large corporates, the conversation is dominated by the Senior Citizen Savings Scheme (SCSS), with its ₹30 lakh ceiling and quarterly payout at 8.2 per cent. The annuity is routinely excluded from the presentation. A chartered accountant’s brief is to legally minimise tax, and an annuity taxed at slab rates for life sits at the wrong end of that equation. Fee-based wealth advisors lose Assets Under Management (AUM) when a corpus is annuitised. The distribution ecosystem has no natural advocate for the product. Other objections exist — near-total loss of liquidity, inflation risk, perceived lower yields — but these are secondary. The yield objection dissolves on an honest comparison: a bank fixed deposit offers no 30-year yield guarantee, meaning the true benchmark is the safe withdrawal rate of a self-managed corpus, against which the annuity competes before tax and loses only after it.For annuities purchased outside the NPS, the position is worse. The initial corpus represents already-taxed household savings. Indian tax law, unlike the American “Exclusion Ratio” system, does not divide the payout into capital return and interest yield. Part of each year’s fully taxed payment is simply the buyer’s own capital returning to them — resulting in double taxation.Countering the fiscal objections: The proposalThe predictable objection from the Ministry of Finance and the Central Board of Direct Taxes (CBDT) is that the NPS subscriber already receives EEE (Exempt-Exempt-Exempt) relief at prior stages — contributions, internal growth, lump-sum exit, and annuity purchase — so exempting the payout creates an excessive tax shelter.This argument misunderstands the underlying yield. Annuity income is, in substantial part, the yield on the insurer’s deployment in government debt. Taxing it taxes the sovereign’s own debt service passing through an insurance balance sheet. Furthermore, the concession is not earned merely because insurers hold G-Secs; it is earned because the annuity combines three vital public objectives in one regulated product: it finances long-duration sovereign borrowing, transfers longevity risk away from households, and reduces the state’s future welfare liabilities.To make the concession fiscally honest and leak-proof, Parliament should amend the tax code to provide that annual annuity income up to ₹12 lakh be excluded from total income altogether for regulated lifetime products of IRDAI-registered insurers, with a flat 10 per cent final withholding tax on the excess.The ₹12 lakh threshold is deliberate: it matches the level up to which Parliament has already determined that a resident individual should pay no tax in the default tax regime. However, while the current rebate vanishes once total income crosses the threshold, an explicit exclusion protects the retirement income baseline regardless of other income streams.To prevent tax arbitrage, the exclusion should apply strictly to lifetime variants purchased at or after superannuation that return the purchase price to nominees upon death, closing the door on disguised tax-free bonds, deferred accumulation vehicles, or surrender-heavy wealth products. Insurers would report every exempt payout through PAN-based tracking.The fiscal and economic returnWhile direct tax revenue will initially be foregone, the broader fiscal math is compelling. If this tax parity expands the retail annuity market, the additional institutional capital flowing into long-dated central government securities and state development loans could conservatively reach ₹40,000-50,000 crore annually. At a modest 50-basis-point borrowing cost advantage for the sovereign, those interest savings accumulate on a growing stock of public debt year after year, easily offsetting direct tax foregone.More importantly, every retiree whose lifetime income is secured through an annuity is a citizen who will never require state-funded emergency welfare or social safety net support in old age. That long-term reduction in social spending will never show up in traditional budget accounting, but its macroeconomic value is immense.Completing the tradeSequence matters for implementation. Before the tax concession takes effect, IRDAI should mandate inflation-linked annuity variants, tighten distributor controls, and prescribe standardised yield disclosures, while PFRDA builds a transparent rate comparison platform. Simultaneously, withholding tax provisions must be aligned; an exemption that still leaves tax deducted at source to be reclaimed a year later creates friction no distributor can overcome.The capital gains bond and the tax-free infrastructure bond both succeeded because the government identified a national priority and offered a calibrated tax trade: revenue foregone to attract stable, long-duration capital. The annuity offers the exact same exchange at greater scale and longer duration, for an urgent societal need: guaranteed lifetime income for an ageing population.The Union Government has proved twice that it will make this trade. With the recent GST exemption, it has begun a third time. What remains is the willingness to finish it. Remove the income tax up to the threshold, put the annuity on the retirement planner’s table, and let retail capital fund the nation.Kumar is former Managing Director, and Sudhakar is former Executive Director (Marketing), LIC. Views expressed are personalPublished on August 20, 2026