Integrated circuit packaging system with encapsulation and underfill and method of manufacture thereof

A method of manufacture of an integrated circuit packaging system includes: providing a package carrier having a dispense port; attaching an integrated circuit to the package carrier and over the dispense port; placing a mold chase over the integrated circuit and on the package carrier, the mold chase having a hole; and forming an encapsulation through the dispense port or the hole, the encapsulation surrounding the integrated circuit including completely filled in a space between the integrated circuit and the package carrier, and in a portion of the hole, the encapsulation having an elevated portion or a removal surface resulting from the elevated portion detached.