Bizzare tax treatment of income from Annuity

I have been going nuts over the tax treatment of pension Income one generates from an Annuity, especially so from the corpus earned from NPS. While I am certain , this is the case but looking for validation.

We all know the following facts:

  1. The NPS corpus we accumulate consists of the principal we put in + the profits we’ve earned over the years.
  2. 60% of NPS withdrawal is tax free (principal + profit)
  3. We have to compulsorily buy Annuity for 40% of amount - of course this is also tax free to buy the annuity

Now, when we buy the Annuity with 40% corpus , we are promised a pension for a certain period (or life) and the same becomes fully taxable in our hands. The bizzare truth here is that the pension we’re getting is nothing but an accumulation of the principal we contributed over the years + the profit we earned over these years. This means that we’re not only paying tax on the profits we earned but also on the principal. This is unbelievable.
The only case where we may end up saving all tax is when the total income from Pension + Other income would be less than 5 lacs. Once I exceed this limit , things turn bad as the more I earn the more tax I pay as per slabs.
Compare this option to say investing in an index fund over these years. I can look to get similar returns as NPS and continue to pay 10% long term tax over only my profits - principal always remain non taxable.

I do realize that there are many if and buts here, especially about the tax benefit you get on investing in NPS but then that’s minimal.

So, Annuity seems to be the only instrument where I can take any corpus I have accumulated by paying all my taxes and again convert that corpus into something fully taxable for both principal + profit. I just cant believe that this is true, Am I missing something here???

Hey @Laxmi_Navlani , can you please help here

Any views on this please? Can someone validate my understanding?