NPS Exit at 60: Why 40% of Your Corpus Must Buy an Annuity While 60% Comes to You as Lumpsum

When you retire from the National Pension System at age 60, you do not simply cash out the whole balance. The Pension Fund Regulatory and Development Authority (PFRDA) enforces a hard split under the All Citizen Model: a minimum of 40% of your accumulated pension wealth must buy an annuity, and up to 60% can be taken as a tax-free lumpsum. There is exactly one exception, and it is the number every subscriber approaching superannuation should memorise: if your total corpus is Rs 5 lakh or less, you may withdraw 100% in cash and skip the annuity entirely. This article walks through the rule as written in the PFRDA exit FAQs, the tax treatment under the Income Tax Act, and a multi-year drawdown worked in full rupees.

The 60/40 split is not a suggestion you can negotiate at the counter. It is the default exit path for every Tier 1 subscriber reaching 60, and understanding how the two halves are taxed — one exempt, one taxed at slab — is what separates an efficient retirement from a leaky one. For the mechanics of how your Tier 1 balance compounds to that exit-day figure, our NPS calculator models contribution years and expected returns to the rupee.

The Scheme Explained

The National Pension System is a defined-contribution pension regulated by PFRDA under the PFRDA Act 2013. On normal exit at age 60 or on superannuation in the All Citizen Model, PFRDA's published exit rules fix the drawdown structure precisely, as set out in the table below.

The 40% annuity floor is a minimum, not a ceiling. A subscriber who wants a larger guaranteed monthly pension may voluntarily direct 50%, 70%, or even 100% of the corpus into the annuity, as PFRDA's FAQ confirms. What you cannot do above the Rs 5 lakh threshold is take more than 60% as cash. The annuity itself is purchased from an IRDAI-registered Annuity Service Provider (ASP) empanelled with PFRDA, and the monthly payout depends on the annuity variant chosen and the ASP's prevailing rate, which is set by the insurer and not guaranteed by PFRDA.

There is a parallel rule for early exit before 60, which retirees often confuse with the age-60 exit. On premature exit, the mirror figures apply: a minimum 80% must go to annuity and only up to 20% can be taken as lumpsum, with the full-withdrawal waiver applying when the corpus is Rs 2.5 lakh or less. Since this article covers superannuation, the operative numbers throughout are 40/60 and the Rs 5 lakh line. The annuity and superannuation glossary entries define both terms in plain language.

It also helps to be clear on which account the exit rule governs. The 40/60 split applies to the Tier 1 pension account — the retirement account with the lock-in. The Tier 2 account, a voluntary add-on with no lock-in, has no annuity requirement at all and can be withdrawn freely at any time, though it carries none of the Section 10(12A) exemption on exit. When PFRDA and this article speak of the "40% annuity, 60% lumpsum" rule, it is strictly the Tier 1 corpus at age 60 that is in view.

The annuity you buy with the mandatory 40% is not a single product. PFRDA-empanelled ASPs offer several variants: a "life annuity" that stops on the annuitant's death, a "life annuity with return of purchase price" that pays a lower monthly sum but returns the Rs 40 lakh capital to the nominee, and "joint life" options that continue to a surviving spouse. The variant chosen at exit is irreversible, so the trade-off between a higher monthly payout and capital preservation for heirs is one of the most consequential decisions of the whole NPS journey.

Separately, the NPS allows partial withdrawals during the accumulation phase — up to 25% of your own contributions (not the employer's, and not the growth) — for defined needs such as higher education, marriage, a first home, or specified illnesses, after a minimum three-year lock-in. These partial withdrawals are capped at three occasions across the entire tenure and do not disturb the 40/60 exit maths described above.

Tax on Withdrawal

The tax treatment of an NPS exit at 60 is genuinely favourable, and it turns on three distinct provisions of the Income Tax Act. Getting them straight is the difference between a clean exit and an avoidable notice.

The 60% lumpsum is fully tax-exempt. Under Section 10(12A) of the Income Tax Act, the lumpsum received on closure or opting out of NPS at superannuation is exempt up to 60% of the total accumulated corpus. Since Budget 2019 raised this exemption from 40% to the full 60%, the entire cash portion you are permitted to withdraw at 60 comes to you tax-free, whichever tax regime you are in.

The 40% annuity purchase is not taxed at the moment of purchase. Moving your mandatory 40% into an annuity is treated as a continuation of the pension, not a taxable event, so no tax is deducted when the annuity is bought. The catch arrives later: the monthly annuity income is taxable in the year of receipt as per your income-tax slab, under the head "income from other sources" or salary as applicable.

Partial withdrawals during service are also exempt. Under Section 10(12B), the up-to-25%-of-own-contributions partial withdrawals described earlier are tax-free. The NPS glossary entry summarises these three exemptions together.

A point retirees frequently get wrong: the Section 80CCD(1B) additional deduction of Rs 50,000 for your own NPS contribution is not allowed in the new regime. Section 80CCD(1B) is available only under the old regime and is not allowed in the new regime; in the new regime, only the employer contribution deduction under Section 80CCD(2) survives. That distinction matters when you decide, in your final working years, how much to route through NPS versus other instruments. On the annuity income, remember that under FY 2025-26 the new-regime rebate under Section 87A is now Rs 60,000 (covering taxable income up to Rs 12 lakh), and the new-regime standard deduction is Rs 75,000 — both of which can shelter a modest annuity pension from tax entirely.

Worked Drawdown

Take a subscriber, Meera, retiring on 1 August 2026 at age 60 with an NPS Tier 1 corpus of Rs 1 crore. Because her corpus is above Rs 5 lakh, the 40/60 rule binds.

The split at exit:

• 60% lumpsum = Rs 60,00,000, received tax-free under Section 10(12A).
• 40% annuity = Rs 40,00,000, used to buy an annuity from her chosen ASP.

At an illustrative annuity rate of 6% per annum (a "life annuity without return of purchase price" typically pays more, one "with return of purchase price" pays less; rates are set by the insurer), her Rs 40 lakh generates Rs 2,40,000 per year, or Rs 20,000 per month, taxable at slab. If the annuity is her only taxable income, the new-regime standard deduction of Rs 75,000 plus the Section 87A rebate leave her with zero tax on that Rs 2.4 lakh pension, since it sits far below the Rs 12 lakh rebate ceiling.

Now the strategic question every retiree faces: what do you do with the Rs 60 lakh lumpsum? A common drawdown choice is to compare a second annuity against a Senior Citizens Savings Scheme (SCSS) deployment. Here is the comparison in current rupees.

Deploying Rs 30 lakh into SCSS at 8.2% (the Q2 FY 2026-27 rate, unchanged since 1 July 2026) yields Rs 2,46,000 a year with a five-year lock, while the balance in PPF at 7.1% adds roughly Rs 2,13,000. Combined with her Rs 2.4 lakh NPS annuity, Meera's total first-year retirement income lands near Rs 6.99 lakh — with the SCSS and PPF corpus still intact and inheritable, unlike the annuity capital, which is surrendered to the insurer. Model your own version of this trade-off with our annuity vs SWP calculator and the retirement drawdown calculator, which project a corpus across a 25 to 30 year retirement.

Project this forward and the structure holds up. In year one (FY 2026-27), Meera draws Rs 6.99 lakh with roughly Rs 2.46 lakh of it — the SCSS interest — taxable at slab, comfortably inside her new-regime allowances. When the five-year SCSS term closes in 2031, the full Rs 30 lakh principal returns to her intact and can be reinvested or passed on; the NPS annuity, by contrast, keeps paying Rs 20,000 a month for life but leaves no residual capital under a plain life-annuity variant. That asymmetry is precisely why the compulsory 40% is best treated as the guaranteed floor of the plan rather than its whole edifice.

Over a multi-year horizon, the difference compounds. SCSS interest is fully taxable at slab, but with prudent structuring across spouse accounts (each senior can hold up to Rs 30 lakh in SCSS, a household ceiling of Rs 60 lakh), a couple can keep the bulk of their lumpsum in capital-preserving, inheritable instruments while the compulsory 40% NPS annuity provides a guaranteed lifelong floor. That combination — a guaranteed annuity base plus a liquid, heritable SCSS/PPF layer — is the drawdown structure most Certified Financial Planners build around the 40/60 rule.

FAQ

Can I withdraw 100% of my NPS corpus at 60?

Only if your total accumulated pension wealth is Rs 5 lakh or less. In that case PFRDA's exit rules waive the annuity requirement and you may take the entire balance as a lumpsum. Above Rs 5 lakh, a minimum of 40% must compulsorily buy an annuity and the maximum lumpsum is 60%.

Is the 60% NPS lumpsum taxable?

No. Under Section 10(12A) of the Income Tax Act, the lumpsum on exit at superannuation is exempt up to 60% of the total corpus. Since Budget 2019 raised the exemption to the full 60%, the entire permitted cash withdrawal at age 60 is tax-free in both the old and new regimes.

Is the NPS annuity income tax-free?

No. While no tax applies when the 40% is used to purchase the annuity, the monthly annuity payout is taxable at your slab rate in the year you receive it. Under FY 2025-26, the new-regime standard deduction of Rs 75,000 and the Section 87A rebate (up to Rs 60,000, covering income to Rs 12 lakh) can reduce or eliminate this tax for a modest pension.

Can I choose more than 40% for the annuity?

Yes. The 40% is a minimum. PFRDA permits you to voluntarily direct up to 100% of your corpus into the annuity if you want a larger guaranteed monthly pension. You simply cannot take more than 60% as a lumpsum when the corpus exceeds Rs 5 lakh.

What annuity rate will I actually get?

The rate is set by the IRDAI-registered Annuity Service Provider you choose, not by PFRDA, and varies by annuity type — a "life annuity without return of purchase price" pays the most, one "with return of purchase price" pays less because your heirs get the capital back. The illustrative 6% used above is a planning figure, not a guarantee; compare live ASP quotes at exit.

Does the Rs 5 lakh full-withdrawal limit apply to early exit too?

No. The Rs 5 lakh line is for normal exit at 60. For premature exit before 60, the full-withdrawal waiver applies only up to a Rs 2.5 lakh corpus, and otherwise a minimum 80% (not 40%) must buy the annuity, with a maximum 20% lumpsum.

Is the NPS 80CCD(1B) deduction available in the new tax regime?

No. Section 80CCD(1B) is not allowed in the new regime. The Rs 50,000 additional deduction under Section 80CCD(1B) for your own NPS contribution is available only in the old regime and is not allowed in the new regime; in the new regime, only the employer contribution deduction under Section 80CCD(2) is allowed.