A method of manufacture of an integrated circuit packaging system includes: providing a package substrate having a warpage-compensation zone with a substrate-interior layer exposed from a top substrate-cover, and the warpage-compensation zone having contiguous exposed portion of the substrate-interior layer over corner portions of the package substrate; connecting an integrated circuit die to the package substrate with an internal interconnect; and forming an encapsulation over the integrated circuit die, with the encapsulation directly on the substrate-interior layer in the warpage-compensation zone.