NPS Exit at Age 60: How the 40 Percent Annuity and 60 Percent Lump-Sum Rule Actually Works

The National Pension System (NPS) hands most subscribers one irreversible decision at superannuation: how to split an accumulated corpus that is, by law, part cash and part pension. Under the Pension Fund Regulatory and Development Authority (PFRDA) All-Citizen model, a minimum of 40% of the accumulated pension wealth at age 60 must be used to buy an annuity, and up to 60% may be taken as a lump sum (PFRDA, Exits for All-Citizen Model FAQ). Get the split and its timing right and a Rs 1 crore corpus can fund a blended monthly income for two decades and more; get it wrong and a large slice sits in an annuity you cannot unwind.

This guide walks through the exact exit rules as they stand in FY 2025-26, the tax treatment of each rupee that leaves the account, and a multi-year worked drawdown that pits the compulsory annuity against a self-managed withdrawal from the lump sum. Every figure below is drawn from PFRDA rules, the Income-tax Act, or the small-savings rates notified for the July-September 2026 quarter. You can model your own numbers on the Oquilia NPS calculator before you decide.

The Scheme Explained

At superannuation, which PFRDA fixes at age 60 for the All-Citizen and corporate models, the accumulated pension wealth is split under a single statutory ratio: at least 40% must purchase an annuity from an IRDAI-registered Annuity Service Provider, and the balance of up to 60% is paid out as a lump sum (PFRDA All-Citizen exit FAQ). The 40% floor is a minimum, not a target; a subscriber may annuitise more and take a smaller lump sum, but never less than 40%.

There is one important escape hatch. If the total corpus at 60 is Rs 5,00,000 or less, the subscriber may withdraw the entire amount as a lump sum with no compulsory annuity at all (PFRDA, 2025). This threshold matters for the roughly large share of NPS accounts that never cross a modest balance, and it is why very small pots are often best closed outright rather than annuitised into a token monthly pension.

Premature exit, meaning any exit before 60, is treated far more conservatively. Here the ratio inverts: a minimum of 80% of the corpus must buy an annuity and only 20% can be withdrawn, with full lump-sum withdrawal permitted only when the corpus is Rs 2,50,000 or less (PFRDA). Because an 80% annuitisation locks away the bulk of the money for life, premature exit is rarely the efficient choice unless the balance is trivially small.

Deferral is the third, often-overlooked option. A subscriber reaching 60 need not exit at all: PFRDA permits continuation of contributions and deferral of both the lump sum and the annuity purchase up to age 75. Continuing lets the corpus compound for up to 15 further years and lets you time the annuity purchase to a year when annuity rates are more favourable. The superannuation date is therefore a window, not a deadline.

The annuity itself is not an NPS product. Once you commit the 40%-plus slice, the chosen Annuity Service Provider issues an IRDAI-regulated immediate-annuity policy, and the pension you receive depends entirely on the annuity option and the rate on offer that day. A single-life annuity without return of purchase price pays the most; a joint-life annuity with return of purchase price to the nominee pays the least. Understanding this annuity mechanics is essential because, unlike the NPS corpus, the annuity cannot be surrendered once bought.

Tax on Withdrawal

The single biggest reason the 60% lump sum is attractive is that it is entirely tax-free. Section 10(12A) of the Income-tax Act, 1961 exempts the payment received on closure or opting out of NPS to the extent it does not exceed 60% of the total corpus (incometax.gov.in). So on a Rs 1 crore corpus, the full Rs 60,00,000 lump sum reaches your bank account without a rupee of tax, in either the old or the new regime.

The 40% used to buy the annuity is also not taxed at the point of purchase; the tax simply moves to the pension stage. The monthly annuity you subsequently receive is fully taxable as income in the year of receipt, added to your other income and taxed at slab rates. Under the new regime for FY 2025-26 the slabs run from nil up to Rs 4,00,000 to 30% above Rs 24,00,000, with a standard deduction of Rs 75,000 available against pension income and a Section 87A rebate that makes income up to Rs 12,00,000 effectively tax-free (Income-tax Act, FY 2025-26 slabs).

Partial withdrawals made during the accumulation phase get their own exemption. Section 10(12B) exempts partial withdrawals up to 25% of the subscriber's own contributions (incometax.gov.in), which NPS allows for specified needs such as higher education, marriage, a house purchase, or serious illness. This is distinct from the exit lump sum and does not reduce the 60% exemption available at 60.

On the deduction side, the position depends on which regime you choose. The Section 80CCD(1B) deduction of up to Rs 50,000 for your own NPS contribution is available only under the old regime and is not allowed in the new regime for FY 2025-26. The Section 80CCD(2) deduction for the employer's contribution, by contrast, is available in both regimes, capped at 14% of salary for the new regime. Choosing a regime therefore changes the economics of NPS on the way in as well as the tax on the pension on the way out.

A word on what the lump sum is not. The exempt 60% is not a capital gain, so the LTCG rate of 12.5% above Rs 1,25,000 that applies to equity does not touch it (Budget 2024). Where capital-gains tax does re-enter the picture is later, if you reinvest the tax-free lump sum into mutual funds or equity and then sell, at which point normal LTCG and STCG rules apply to those investments, not to the NPS payout.

Worked Drawdown

Consider a subscriber, aged 60 on exit, with an accumulated NPS corpus of Rs 1,00,00,000. The figures that follow use illustrative growth and annuity rates and are for demonstration only; your actual annuity quote and market returns will differ.

At the 40:60 split, Rs 40,00,000 buys the compulsory annuity and Rs 60,00,000 is taken as the tax-free lump sum. At an illustrative annuity rate of 6% per annum on a single-life immediate annuity, the Rs 40,00,000 produces Rs 2,40,000 a year, or Rs 20,000 a month, taxable at slab rates for life. That pension is guaranteed and insulated from markets, but it is fixed and, at 6%, barely keeps pace with the 5.0% CPI inflation the RBI projected for FY 2026-27 at its 5 August 2026 meeting.

The Rs 60,00,000 lump sum is where drawdown strategy lives. Suppose it is invested conservatively to earn an illustrative 8% per annum, anchored to the 8.2% that the Senior Citizens' Savings Scheme pays for the July-September 2026 quarter (small-savings notification, Q2 FY 2026-27), and the retiree draws Rs 50,000 a month, or Rs 6,00,000 a year, from it. The pot depletes slowly at first and then faster, as the table shows.

Add the two streams together and the retiree draws Rs 20,000 from the annuity plus Rs 50,000 from the lump sum, a blended Rs 70,000 a month from age 60. The annuity portion continues for life, so even after the self-managed pot runs dry in year 21 (around age 81), the Rs 20,000 monthly annuity keeps paying. This is the structural point of the 40% floor: it buys longevity insurance the lump-sum drawdown cannot, because a self-managed pot can be exhausted while an annuity cannot.

The alternative is to route part of the lump sum through the Senior Citizens' Savings Scheme rather than a market portfolio. A retiree can invest up to Rs 30,00,000 in SCSS, which at the current 8.2% pays Rs 2,46,000 a year, or Rs 20,500 a month, with quarterly payouts and sovereign backing (small-savings notification, Q2 FY 2026-27). Placing Rs 30,00,000 in SCSS and drawing the remaining Rs 30,00,000 as a flexible reserve gives a floor of Rs 40,500 a month from the annuity and SCSS combined, before touching the reserve. You can compare a fixed annuity against a systematic withdrawal plan on the annuity vs SWP calculator and stress-test the depletion timeline on the retirement drawdown calculator.

The judgement, then, is not annuity or lump sum, because the law forces at least 40% into the annuity. It is how aggressively to draw the 60% and how much of it to keep in guaranteed instruments such as SCSS versus growth assets whose LTCG at 12.5% applies only when you sell. A retiree who wants the highest lifelong floor annuitises more than 40%; one who wants flexibility and a bequest keeps closer to the 60% cap in self-managed assets and accepts the risk that the pot can run dry, as it does in year 21 in the illustration above.

FAQ

Can I withdraw 100% of my NPS at 60 and skip the annuity?

Only if your total corpus at superannuation is Rs 5,00,000 or less; in that case PFRDA permits full lump-sum withdrawal with no annuity. Above Rs 5,00,000, the 40% minimum annuity is compulsory and at most 60% can be taken as cash (PFRDA All-Citizen exit FAQ).

Is the 60% NPS lump sum really tax-free?

Yes. Section 10(12A) of the Income-tax Act exempts the exit payment up to 60% of the corpus, so a Rs 60,00,000 lump sum from a Rs 1 crore corpus is fully exempt in both the old and new regimes for FY 2025-26 (incometax.gov.in). Only the subsequent annuity income is taxable, at slab rates.

What happens if I exit NPS before age 60?

Premature exit requires a minimum of 80% of the corpus to buy an annuity, with only 20% withdrawable, and full withdrawal is allowed only when the corpus is Rs 2,50,000 or less (PFRDA). Because 80% is locked into a lifelong annuity, premature exit is usually inefficient unless the balance is very small.

Can I delay buying the annuity after 60?

Yes. PFRDA allows deferral of the lump sum and the annuity purchase, and continued contributions, up to age 75. Deferring lets the corpus compound for up to 15 more years and lets you time the annuity purchase to a period of higher annuity rates.

Is the Section 80CCD(1B) Rs 50,000 deduction available in the new regime?

No. The additional Section 80CCD(1B) deduction of up to Rs 50,000 for your own contribution is available only under the old regime for FY 2025-26. The Section 80CCD(2) deduction for the employer's contribution remains available in the new regime, capped at 14% of salary.

How much monthly pension will Rs 40 lakh in annuity give me?

At an illustrative single-life annuity rate of 6% per annum, Rs 40,00,000 yields Rs 2,40,000 a year, or Rs 20,000 a month, taxable at slab rates. The exact figure depends on the annuity option and the rate your Annuity Service Provider offers on the purchase date, so obtain a live quote before committing.

Does buying more than 40% as annuity make sense?

It can, if your priority is the highest guaranteed lifelong income and you have limited other pension cover, because the annuity cannot be outlived whereas a self-managed pot can be exhausted, as it is in year 21 in the worked example above. If flexibility, higher expected returns, or leaving a bequest matter more, staying near the 40% floor and self-managing the 60% is usually preferable.