A method of manufacture of an integrated circuit packaging system includes: providing a first board-on-chip-structure having a first integrated circuit die mounted over a substrate and the substrate having a substrate cavity; mounting a second board-on-chip-structure over the first board-on-chip-structure, the second board-on-chip-structure having a second integrated circuit die mounted under an interposer and the interposer having an interposer cavity; connecting the first board-on-chip-structure to the second board-on-chip-structure with an internal interconnect; and encapsulating the first board-on-chip-structure, the second board-on-chip-structure, and the internal interconnect with an encapsulation.