A method of manufacture of an integrated circuit packaging system includes: providing an internal structure substrate having an internal structure substrate cavity; mounting an internal structure die above the internal structure substrate; encapsulating the internal structure die with an internal structure encapsulation to form an internal structure package; forming an internal structure protrusion in the internal structure encapsulation below the internal structure substrate cavity; mounting the internal structure package above a substrate; and encapsulating the internal structure package above the substrate with an encapsulation.