Annuity Due

Annuity due refers to an annuity in which the money is paid at the beginning of a period rather than at the end. For example, paying your rent before you move into the house. To generate continuous revenue, it is usually applied to pensions, retirement schemes, or insurance because it involves future money. Concepts such as Present Value (PV) and Future Value (FV) can be used to determine its actual worth now or in the future.

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Updated on: Sep 12, 2025

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What is Annuity Due?

Before you dive into understanding what an annuity due is, you must know what annuity means. Annuity is a series of payments made at timely intervals, and the timing of when you make these payments helps differentiate its various types. Whereas, annuity due meaning is a payment system where you pay or get the money at the beginning of a period, not at the end.

For example:

When you pay your gym membership fee at the start of the month, that is an annuity due.
If you pay your Netflix subscription before you start watching the shows, that is also an annuity due.
Even your policy premiums on health and life insurance are mostly paid before your insurance policy takes effect.

An annuity due is not like an ordinary annuity, where payments are received only at the end of a payment period. An example will be your credit card bill, which is paid at the end of the month after use of the card.

With earlier payments, the money stands to gain more interest or grow. This implies that in the long term, an annuity due may deliver a greater total value than an ordinary annuity.

How Annuity Due Works?

So, one thing is clear about annuity dues, i.e., they require payment to be made at the beginning instead of at the end (as done in ordinary annuity). This becomes a source of finance for the recipient and a legal obligation to make timely payments for the payer.

In order to effectively compute the amount of future annuity payments, it is important to consider the time value of money. The principle dictates the way to determine the present value, which tells us the amount of future revenues in present terms.

An easy example is a life annuity due, usually offered in insurance. Here, payments commence at the beginning of every month, quarter of the year, or annually, meaning that an individual will receive regular transactions that are guaranteed until death. However, upon the death of the annuitant, any outstanding balance is typically returned to the insurance company.

Even retirement products, such as the National Pension Scheme (NPS), utilize annuity concepts. In fact, under NPS, a portion of accumulated savings can be used to buy an annuity in NPS. This ensures regular income, and depending on the plan you choose, it can work as an annuity due, where your payments start right away, giving you extra financial security in your retirement years.

Annuity Due vs. Ordinary Annuity

A major difference between a due annuity and an ordinary annuity is the timing when the payments are supposed to be made. To help you understand better, here is a comparison between the two:

Feature	Annuity Due	Ordinary Annuity
Payment Timing	At the beginning of each period	At the end of each period
First Payment Date	Starts immediately	Starts after one period
Examples	Rent, insurance premiums, and lease payments	Loan EMIs, bond interest, and salary payments
Compounding Benefit	Higher because payments get extra time to grow	Lower because of less compounding time
Present Value	Higher, since money comes in earlier	Lower, since payments are delayed
Future Value	Higher, more time in the market	Lower grows for a shorter duration
Best For	Retirement income, upfront payment needs	Loan repayments, long-term borrowing
Financial Advantage	Quicker access to money, better for retirees	Easier to manage debts and outflows

Annuity Due Formula

In annuity due, since the money comes in earlier, it earns more interest compared to payments made at the end of the period.

To figure out how much this is worth, there are two main formulas you need to know:

Present Value (PV) of Annuity Due

This tells you the total value of all payments in today’s terms.

PV = PMT x [(1 - (1 - r)^-n)/r] x (1 + r)

Future Value (FV) of Annuity Due

This tells you how much all your payments will grow into after the full term, including interest.

FV = PMT x [((1 + r)^n-1)/r] x (1 + r)

Here,

PMT = Periodic payment amount

r = Interest rate per period

n = No. of periods

Let us understand this annuity due equation further using an example where, let’s say:

You receive ₹2,000 at the beginning of every year
For 8 years
At an annual interest rate of 6% (0.06)

Present Value (PV)

PV = 2000 × [(1 – (1.06)^-8) / 0.06] × (1.06)

Step-by-step for the present value or annuity due formula:

(1.06)^-8 = 0.6274
(1 - 0.6274) / 0.06 = 6.239
Multiply by 1.06 = 6.613
PV = 2000 × 6.613 = ₹13,226

This means the value of receiving ₹2,000 each year (at the start) for 8 years is ₹13,226 in today’s terms.

Future Value

FV = 2000 × [((1.06)^8 – 1) / 0.06] × (1.06)

Step-by-step for the future value of annuity due formula:

(1.06)^8 = 1.5938
(1.5938 - 1) / 0.06 = 9.896
Multiply by 1.06 = 10.490
FV = 2000 × 10.490 = ₹20,980

This means, after 8 years, your savings will grow to around ₹20,980.

This annuity due formula showcases how money received at the start of each period gets extra time to grow. That is why the value is always higher compared to ordinary annuities (where payments are at the end).

Calculating the Value of an Annuity Due

While a retirement calculator is used to calculate retirement pension, annuity due is calculated using a formula. The current and future value of a due annuity are calculated using special formulae. These estimates are important in the evaluation of the investment value as it goes on.

Consider an example where an annuitant receives ₹5,000 each year over the next 10 years at an annual interest rate of 5%. To calculate what the present value of this series of payments would be, they would compute the present value of an annuity due formula in the following manner:

PV Annuity Due = ₹5000 x [ 1-(1+.05)-10 / .05 ] x (1+ .05)

Likewise, to calculate the future value of the same stream of payments, they would use the future value of annuity due formula:

FV Annuity Due = ₹5000 x [ (1+.05)-10/- 1 / .05 ] x (1+ .05)

Present Value of an Annuity Due

The present value of an annuity due provides us with the current value of a number of anticipated annuity payments. In other words, it shows what the future total to be paid is worth now.

Although the present value calculation of a due annuity and an ordinary annuity have similarities, payment timing brings a major difference. With annuity due, payments come at the beginning of the period, and, in ordinary annuity, they come at the end. The present value of an annuity due is computed by:

PV Annuity Due = C x [ 1-(1+i)-n / i ] x (1+ i)

Future Value of an Annuity Due

The future value of annuity due shows you what your payments will be worth later. And just like with present value, there is a difference in how you calculate future value for annuities due versus regular ones. The formula for calculating the future value of an annuity due is:

FV Annuity Due = C x [ 1-(1+i)n / i ] x (1+ i)

Tax Implications of Annuity Due

When you start earning income through your annuity due post-retirement, it becomes important for you to learn about how it gets taxed. The taxation depends on how you bought the annuity, be it using taxable income, pension funds, or through long-term retirement savings.

One key concept that reduces your tax liability is indexation, which adjusts your investment value for inflation.

How Indexation Works

The government publishes a Cost Inflation Index (CII) every year. Using CII, the purchase cost of your annuity is adjusted to account for inflation. This reduces your taxable capital gains.

Formula:

Indexed Cost = Purchase Price x CII of Sale Year/CII of Purchase Year

Once the indexed cost is calculated, it is subtracted from the sale/surrender value of the annuity. The balance is treated as capital gains and taxed at 20% with indexation (under current laws).

Why Indexation Helps

Indexation lowers your taxable gains by recognising that inflation has eroded the value of money over time. This is especially beneficial for long-term products like annuities.

Example:

Suppose you purchased an annuity for ₹4 lakh, and after a few years, its surrender value is ₹5.2 lakh.

Without indexation:

Taxable capital gain = ₹5.2 lakh - ₹4 lakh = ₹1.2 lakh

With indexation:

If the indexed cost = ₹5.1 lakh, then

Taxable capital gain = ₹5.2 lakh - ₹5.1 lakh = ₹10,000

Tax payable (20% of ₹10,000) = ₹2,000 only

Income from an annuity due is taxable, but using indexation benefits can significantly reduce your tax liability. This makes annuities a more tax-efficient choice for long-term retirement plans.

Conclusion

Understanding annuity due is more than just learning a formula; it is about becoming aware of the power of opting to pay it at the right time in order to gain more wealth in the future. With payments being made at the start of each period, your money has more time to compound, and this can actually make a major difference when it comes to retirement income.

Whether you are just getting started with saving or are almost ready to retire, learning about annuity due will help you make educated choices. Moreover, opting for the right annuity structure can provide you with better returns and peace of mind of having a steady income in your golden years.

FAQs on Annuity Due

What is an annuity due?

A life annuity due is a classification of annuity that offers regular payments for the entire life of an individual. The payments, in this case, begin immediately. Examples include rent or lease payments often due at the start of the month.

How does an annuity due differ from an ordinary annuity?

When it comes to annuity due, you are supposed to make the payments at the start. But, in terms of an ordinary annuity, you are supposed to make payments at the end of the period. This difference in the timing of payment also affects the calculation of present and future values.

What are some common examples of due annuity payments?

Common examples include rent payments (often due on the 1st of the month), lease payments, and insurance premiums (sometimes paid at the start of the policy period). In short, any regular payment that you make at the start of a period can be considered an annuity due.

How is the present value of an annuity due calculated?

The present value of an annuity due is calculated by using this formula: PV = C x [ 1-(1+i)-n / i ] x (1+ i). This reflects the fact that each payment is received one period earlier, thus having a higher present value.

How is the future value of an annuity due calculated?

The future value of an annuity due is calculated by FV Annuity Due = C x [ 1-(1+i)n / i ] x (1+ i). This accounts for the extra period of interest earned on each payment since they are made at the beginning of each period.

Why are annuity due payments higher than ordinary annuity payments?

The payments themselves aren’t higher; the value (present or future) is higher. This happens because every payment made in an annuity due gets more interest for an additional period as compared to an ordinary annuity. This results in more accumulated value.

What is the formula for calculating an annuity due?

The core formula builds upon the ordinary annuity. For present value: PV Annuity Due = C x [ 1-(1+i)-n / i ] x (1+ i). For future value: FV Annuity Due = C x [ 1-(1+i)n / i ] x (1+ i), where C = Cashflows per period, i = Interest rate per period, and n = Number of periods.