NPS for Salaried Employees: Corporate-Model Exit Rules and the 25 Percent Partial Withdrawal Cap

The National Pension System (NPS) reaches most salaried Indians through one of two doors: the All-Citizen model that anyone opens on their own, or the Corporate model that an employer sets up for its workforce. They share the same underlying pension fund, the same regulator in the Pension Fund Regulatory and Development Authority (PFRDA), and the same Tier I lock-in until age 60. Where they part company is on contributions and, crucially, on how the money comes out. This guide sets the Corporate model against the All-Citizen model on exit mechanics, then against the Employees' Provident Fund (EPF) as the other default retirement pot a salaried worker carries, so you can plan a drawdown rather than be surprised by it.

The single number that trips up most Corporate-model subscribers is the partial withdrawal cap: 25% of your own contributions, not 25% of the whole corpus. On a fund where the employer has been adding its share every month, that distinction can halve the figure a subscriber expects to be able to take out mid-career.

The Scheme Explained

Under the NPS Corporate model, both the employer and the employee route contributions into the same Tier I account the employee would hold in the All-Citizen model. Per the PFRDA Corporate-model exit FAQ, the exit architecture is identical to the individual scheme; only the funding is shared. The employer's contribution is the differentiator that makes the Corporate model attractive to a salaried person, because of how Section 80CCD(2) treats it.

Employer contributions to NPS are deductible under Section 80CCD(2) of the Income-tax Act, 1961, and this deduction survives in the new tax regime, capped at 14% of salary (basic plus dearness allowance) for the FY 2025-26 year against 10% in the old regime. That makes the Corporate model one of the very few structures that still delivers a live tax break inside the new regime. The additional Rs 50,000 deduction under Section 80CCD(1B), by contrast, is not allowed in the new regime and can be claimed only in the old regime, so a Corporate subscriber on the new regime plans around the 80CCD(2) route alone.

Three exit and access rules define the Corporate model, all confirmed by the PFRDA exit FAQ:

At the normal exit age of 60, a subscriber must use at least 40% of the accumulated corpus to buy an annuity and may take up to 60% as a lump sum; if the total corpus is Rs 5,00,000 or less, the entire amount can be withdrawn as a lump sum with no compulsory annuity. On premature exit before 60, the ratio inverts sharply: at least 80% must go into an annuity and only up to 20% is available as a lump sum, with the full-withdrawal threshold dropping to Rs 2,50,000. Partial withdrawal, distinct from exit, is capped at 25% of the contributions made by the subscriber, is permitted up to three times over the life of the account, and only after three years of membership. You can size the split for your own numbers on the NPS calculator and read the plain-language definition on the NPS glossary entry.

Because both parties fund the Tier I account, the 25% partial-withdrawal base excludes the employer's share entirely. If your own contributions over the years total Rs 12,00,000 while the employer has added another Rs 12,00,000, your maximum partial withdrawal is Rs 3,00,000, not Rs 6,00,000. Partial withdrawals are also gated to specified purposes such as higher education, marriage of children, purchase of a first house, or treatment of specified illnesses, per the PFRDA framework.

Set against EPF, the contrast is one of flexibility versus certainty. EPF pays a declared 8.25% for FY 2025-26 (EPFO, source EPFO declared rate, last reviewed 1 March 2026), a fixed statutory return, whereas NPS returns are market-linked and undeclared in advance. EPF permits a full withdrawal after two months of unemployment and does not force an annuity, while NPS locks 40% into a lifelong pension at 60. A salaried person typically holds both; the NPS glossary and EPF glossary entries set out the definitions side by side.

Tax on Withdrawal

The withdrawal tax treatment is where NPS earns its reputation as an Exempt-Exempt-Exempt (EEE) instrument at exit, subject to conditions. Three separate provisions of the Income-tax Act, 1961, govern the three ways money leaves the account, and they do not all deliver the same result.

The lump sum taken at exit is dealt with by Section 10(12A): up to 60% of the total corpus withdrawn on closure of the account or on opting out is exempt from tax. Applied to the Corporate model, this means the entire 60% lump-sum entitlement at age 60 is tax-free, so a subscriber taking the maximum permitted lump sum pays nothing on it. The amount used to purchase the annuity is not taxed at the point of purchase either, under Section 80CCD(5) read with the exit rules.

Partial withdrawals are covered by Section 10(12B): a partial withdrawal of up to 25% of the subscriber's own contributions is exempt. Since the PFRDA cap is itself 25% of own contributions, a compliant partial withdrawal is fully tax-exempt end to end, which is the single most valuable feature of the mid-career access route for a Corporate subscriber. Verify the section text at incometax.gov.in before relying on it for a specific case.

What is not exempt is the annuity income. The pension you receive from the annuity provider is taxable as income under the head "Salaries" or "Income from other sources" at your applicable slab in the year of receipt. For FY 2025-26 the new-regime slabs run from nil up to Rs 4,00,000 to 30% above Rs 24,00,000, with a Section 87A rebate that makes income up to Rs 12,00,000 effectively tax-free after the rebate rises to Rs 60,000. A retiree whose only income is a modest annuity may therefore pay no tax at all once the standard deduction of Rs 75,000 (new regime, FY 2025-26) is applied.

By comparison, EPF withdrawal is tax-free only if the member has completed five years of continuous service; withdrawal before five years is taxable, with the employer's contribution and interest taxed as salary and the member's own interest taxed as income from other sources. This five-year rule has no NPS equivalent, which is one reason the two schemes are planned differently. If part of your lump sum is later invested in equity mutual funds and redeemed, remember that long-term capital gains above Rs 1,25,000 a year are taxed at 12.5% (Budget 2024), as covered on the LTCG glossary entry.

Worked Drawdown

Consider Anita, a Corporate-model subscriber who reaches age 60 in 2026 with a Tier I corpus of Rs 1,00,00,000. Of that, assume her own contributions across her career totalled Rs 30,00,000 and the employer added the rest along with market growth. She elects the maximum 60% lump sum and the minimum 40% annuity, which the PFRDA rules permit at normal exit.

Her lump sum is Rs 60,00,000, fully exempt under Section 10(12A). Her annuity purchase is Rs 40,00,000. At an illustrative annuity rate of 6% a year (annuity rates are set by the insurer and are not fixed by PFRDA, so treat this as an assumption, not a quoted figure), that buys her a pension of Rs 2,40,000 a year, or Rs 20,000 a month, taxable at slab. You can compare annuitisation against a systematic withdrawal plan on the annuity vs SWP calculator.

Suppose Anita invests the Rs 60,00,000 lump sum in a balanced portfolio and runs a systematic withdrawal plan (SWP) of Rs 30,000 a month, or Rs 3,60,000 a year, assuming an 8% annual return. Because her 6% withdrawal rate sits below the 8% growth assumption, the corpus continues to grow even as she draws from it:

Adding the two streams, Anita draws Rs 3,60,000 from the SWP plus Rs 2,40,000 from the annuity, a combined Rs 6,00,000 a year, while her invested lump sum climbs from Rs 60,00,000 to Rs 67,03,992 over five years. Only the Rs 2,40,000 annuity is taxed at slab; the SWP redemptions attract long-term capital gains at 12.5% only on gains above the Rs 1,25,000 annual exemption (Budget 2024), so her effective tax is modest. Model your own split on the retirement drawdown calculator.

Now the mid-career case. Say at year 10 of membership Anita's own contributions had reached Rs 15,00,000. Her partial-withdrawal ceiling is 25% of that, or Rs 3,75,000, tax-free under Section 10(12B) and permitted because she had crossed the three-year threshold. Had she assumed the cap applied to the whole corpus of, say, Rs 40,00,000 at that point, she would have wrongly expected Rs 10,00,000. The 25%-of-own-contributions rule is the guardrail to plan around.

One more figure belongs in any salaried retirement plan: gratuity. Under Section 10(10) of the Income-tax Act, the tax-exempt gratuity ceiling is Rs 20,00,000 (raised by the Finance Act 2018 notification), not any higher figure. Anita's gratuity, capped for exemption at Rs 20,00,000, sits alongside her NPS lump sum and can be estimated on the gratuity calculator.

FAQ

Is the 25% partial-withdrawal cap on my whole NPS corpus or only my contributions?

Only your own contributions. Per the PFRDA Corporate-model exit FAQ, partial withdrawal is capped at 25% of the contributions made by the subscriber, which excludes the employer's share and all market growth. If you contributed Rs 12,00,000 and the employer added another Rs 12,00,000, your maximum partial withdrawal is Rs 3,00,000. This is also the exemption limit under Section 10(12B).

How many times can I make a partial withdrawal, and when can I start?

Up to three times over the life of the account, and only after completing three years of membership, per the PFRDA exit FAQ. Each withdrawal is subject to the 25%-of-own-contributions ceiling measured at the time of the request, and each must be for a specified purpose such as higher education, children's marriage, first-home purchase, or treatment of a specified illness.

What happens if I exit the NPS before age 60?

On premature exit before 60, at least 80% of the corpus must be used to buy an annuity and up to 20% may be taken as a lump sum, per the PFRDA rules. If the total corpus is Rs 2,50,000 or less, you may withdraw the entire amount as a lump sum with no compulsory annuity. This is the mirror image of the age-60 normal exit, where the annuity minimum is 40% and the small-corpus full-withdrawal threshold is Rs 5,00,000.

Is my NPS lump sum at 60 taxable?

No. Under Section 10(12A) of the Income-tax Act, up to 60% of the corpus withdrawn on exit is fully exempt, so the maximum 60% lump sum a Corporate subscriber can take at age 60 is tax-free. The amount applied to purchase the annuity is not taxed at the point of purchase. Only the monthly pension you subsequently receive from the annuity is taxable at your slab rate in the year of receipt.

Can I still claim the extra Rs 50,000 NPS deduction under the new tax regime?

No. The additional Rs 50,000 deduction under Section 80CCD(1B) is not allowed in the new regime; it can be claimed only in the old regime for FY 2025-26. However, the employer's contribution deduction under Section 80CCD(2) does survive in the new regime, up to 14% of basic-plus-DA salary against 10% in the old regime, which is why the Corporate model retains a tax edge even for new-regime taxpayers.

How does NPS compare with EPF for a salaried employee at retirement?

EPF pays a declared 8.25% for FY 2025-26 and allows a tax-free lump-sum withdrawal after five years of continuous service, with no forced annuity. NPS returns are market-linked and undeclared in advance, and it compels at least 40% into an annuity at 60, but its 60% lump sum is tax-free under Section 10(12A) and its 25% partial withdrawals are exempt under Section 10(12B). Most salaried workers hold both and draw from EPF for a liquid corpus and NPS for a pension floor.