Turning your NPS corpus into a pension: choosing an annuity service provider and the right plan

The moment your National Pension System account reaches normal exit, the corpus you spent decades building stops being a market-linked investment and becomes a decision with lifelong consequences. Under the PFRDA All Citizen Model, at least 40% of the accumulated corpus at superannuation (age 60) must be converted into a pension by buying an annuity from an empanelled Annuity Service Provider (ASP), while up to 60% can be taken as a lump sum. Choosing the wrong ASP or the wrong annuity variant can cut your monthly pension for the rest of your life, and unlike an equity fund you cannot switch it later. This guide walks through how the annuity leg of NPS works, how each choice is taxed, and a multi-year worked example so you can see the drawdown in rupees.

The Scheme Explained

The National Pension System is a defined-contribution pension regulated by the Pension Fund Regulatory and Development Authority (PFRDA) under the PFRDA Act 2013. Unlike PPF at 7.1% or the Senior Citizens' Savings Scheme at 8.2% for the July to September 2026 quarter, NPS carries no government-set rate; the corpus grows with the market performance of the equity, corporate-bond and government-security funds you hold, which is why the exit corpus is never known in advance. You can read the mechanics of the accumulation phase in our NPS glossary entry.

At exit, the PFRDA All Citizen Model splits the corpus by a fixed formula rather than by choice:

The 40% annuity floor at normal exit and the 80% floor at premature exit are the two numbers that shape retirement income the most. The annuity portion must be used to purchase a pension from one of the life insurers empanelled by PFRDA as Annuity Service Providers; the subscriber picks both the provider and the annuity variant at the point of exit. There is one useful escape hatch worth confirming against the PFRDA exit rules: if the total corpus at normal exit is up to Rs 5 lakh (or up to Rs 2.5 lakh at premature exit), the entire amount can be withdrawn as a lump sum with no compulsory annuity, because a very small corpus would buy a trivially small pension.

A second flexibility often missed is timing. You are not forced to buy the annuity the day you turn 60. Annuity purchase can be deferred up to age 75, and the lump-sum withdrawal can be deferred or drawn in instalments up to the same age, which lets the corpus stay invested and potentially compound further before it is locked into a fixed pension. For a comparison of continuing the account versus annuitising, the NPS calculator lets you model different contribution and growth paths up to exit.

The annuity variants offered by ASPs are broadly standardised across providers, though the exact pension rate on each differs by insurer and by the interest-rate environment on the day of purchase. The common options are:

The trade-off is unavoidable: the more the plan protects your spouse or your heirs, the lower the monthly pension, because the insurer is pricing in a longer or a returned liability. Our annuity vs SWP calculator is built precisely to compare a fixed insurer annuity against a self-managed systematic withdrawal, and the annuity glossary entry explains the guarantee mechanics in plain terms.

Tax on Withdrawal

NPS is one of the few instruments where the exit is taxed differently across its two legs, so the split matters for your post-tax income, not just your headline corpus.

The lump-sum leg is the more generous. Under Section 10(12A) of the Income-tax Act, the lump sum withdrawn at superannuation or on reaching 60 is exempt up to 60% of the total corpus, which means the entire 60% permitted at normal exit comes to you tax-free. This exemption is available regardless of whether you file under the old or the new tax regime, and it is the single largest tax break in the whole NPS lifecycle. The Central Board of Direct Taxes administers this exemption through the incometax.gov.in framework, and it is why most retirees take the full 60% lump sum rather than annuitising more than the mandatory 40%.

The annuity leg is taxed as ordinary income. The monthly pension you receive from the ASP is added to your total income for the year and taxed at your applicable slab, whether that is the FY 2025-26 new-regime slabs (nil up to Rs 4 lakh, then 5% from Rs 4 lakh to Rs 8 lakh, rising to 30% above Rs 24 lakh) or the old-regime slabs. For a retiree whose only income is the NPS pension of, say, Rs 3 lakh a year, the Section 87A rebate — now Rs 60,000 in the new regime for income up to Rs 12 lakh — will usually wipe the liability out entirely, so the effective tax on a modest pension is often nil.

A point that trips up planners at the contribution stage, and worth flagging for anyone still building the corpus, is the extra Rs 50,000 deduction under Section 80CCD(1B): Section 80CCD(1B) is NOT allowed in the new regime and is available only in the old regime. The employer-contribution deduction under Section 80CCD(2) is the one that survives in both regimes. None of this changes the exit taxation above, but it changes how efficiently the corpus was built, and readers still in the accumulation phase should factor it in before assuming NPS is uniformly tax-advantaged.

For completeness, the Return of Purchase Price returned to a nominee on the annuitant's death is a return of capital and is generally not treated as taxable income in the nominee's hands, though the pension received up to that point was taxed at slab. Where an NRI subscriber is involved, any Double Taxation Avoidance Agreement relief follows the treaty; India retains taxing rights and DTAA capital-gains relief should never be read as a blanket "exempt" outcome.

Worked Drawdown

Consider a subscriber, Meera, who reaches normal exit at 60 with an NPS corpus of Rs 1 crore. She takes the maximum 60% as a tax-free lump sum and annuitises the mandatory 40%. The figures below use illustrative annuity rates, not quotes: actual ASP rates are set by each insurer on the day of purchase and move with interest rates, so treat these as an example of the arithmetic rather than a promise.

On the Rs 40 lakh annuity leg, the single-life Annuity for Life at an assumed 6.5% would pay about Rs 2,60,000 a year, roughly Rs 21,667 a month, and this pension is added to Meera's slab income each year. The Return of Purchase Price variant at an assumed 6.0% would pay about Rs 2,40,000 a year, roughly Rs 20,000 a month, but on her death the full Rs 40 lakh purchase price returns to her nominee. The gap of about Rs 20,000 a year is the price of preserving the Rs 40 lakh capital for her heirs.

The lump sum is where the multi-year drawdown really happens, because the 60% is hers to deploy. A common strategy is to route the Rs 60 lakh into a mix of the Senior Citizens' Savings Scheme (8.2% for the July to September 2026 quarter, capped at Rs 30 lakh per individual) and a systematic withdrawal plan, rather than annuitising more. The table below shows a simplified five-year drawdown of the Rs 60 lakh lump sum assuming it earns an illustrative 8% a year and Meera withdraws Rs 5 lakh at the end of each year to supplement her pension:

Because the assumed 8% growth exceeds the Rs 5 lakh withdrawal in each year, the Rs 60 lakh capital barely erodes, closing near Rs 58.83 lakh after five years while still funding Rs 5 lakh of annual spending on top of the annuity. Any capital-gains tax on equity-linked withdrawals would apply the LTCG rate of 12.5% above the Rs 1.25 lakh annual exemption introduced in Budget 2024; the arithmetic above is pre-tax to keep the drawdown mechanics clear. Model your own split on the retirement drawdown calculator, and see the pension glossary entry for how a guaranteed annuity differs from a self-managed drawdown.

The lesson from Meera's numbers is that the mandatory 40% annuity is best treated as the floor of guaranteed lifelong income, while the tax-free 60% lump sum is the flexible, potentially higher-yielding pool you actively draw down. Over-annuitising locks more of the corpus into a fixed pension that cannot be reversed and cannot be left to heirs unless you accept the lower ROP rate.

FAQ

What percentage of my NPS corpus must be used to buy an annuity?

At normal exit on reaching age 60 or superannuation, a minimum of 40% of the accumulated corpus must be used to buy an annuity, and up to 60% can be taken as a lump sum. If you exit before 60 (permitted after at least five years in NPS), the annuity floor rises to 80% and only 20% can be withdrawn as a lump sum, under the PFRDA All Citizen Model.

Can I delay buying the annuity after I turn 60?

Yes. Annuity purchase can be deferred up to age 75, and the lump-sum withdrawal can likewise be deferred or drawn in instalments up to the same age. Deferring keeps the corpus invested in your chosen NPS funds, which can allow further growth before the annuity locks in a fixed pension, though it also keeps you exposed to market movements until you annuitise.

Is the NPS lump sum taxable?

No, within the limit. Under Section 10(12A) of the Income-tax Act, the lump sum withdrawn at superannuation or on reaching 60 is exempt up to 60% of the total corpus, which covers the full 60% you are allowed to take at normal exit. The exemption applies in both the old and new tax regimes. Only the annuity pension is taxed, at your slab rate in the year of receipt.

Which annuity plan gives the highest monthly pension?

The single-life Annuity for Life gives the highest pension because it carries no spousal continuation and returns nothing to heirs. Joint Life pays slightly less as it continues to a surviving spouse, and Return of Purchase Price pays the least because the insurer returns the full purchase price to your nominee on death. The right choice depends on whether protecting a spouse or leaving capital to heirs matters more than the headline pension.

Can I choose any Annuity Service Provider I want?

You can choose any ASP empanelled by PFRDA at the time of exit, and you can compare the pension quotes each provider offers on your annuity variant before deciding. Annuity rates differ by insurer and move with prevailing interest rates, so it is worth comparing quotes across providers on the same variant, because the choice is irreversible once the annuity is issued.

What happens to my NPS corpus if I die before exit?

On the death of the subscriber, the nominee can receive up to 100% of the accumulated corpus as a lump sum, subject to the options in force under the PFRDA exit rules. This differs from the living-exit rule where the 40% or 80% annuity floor applies, so the compulsory annuitisation does not bind the nominee in the same way.

Is a very small NPS corpus still subject to compulsory annuity?

No. If the total corpus is up to Rs 5 lakh at normal exit (or up to Rs 2.5 lakh at premature exit), the entire amount can be withdrawn as a lump sum with no compulsory annuity purchase, because such a small corpus would buy only a negligible pension. Confirm the current threshold against the PFRDA exit regulations before relying on it.