NPS exit rules explained: 40% annuity, 60% lump sum and the Rs 5 lakh full-withdrawal threshold

When you retire on the National Pension System, the choice is never simply "how much have I saved" but "how does the corpus come out". Under the All Citizen Model, PFRDA fixes the split for you: at superannuation you must convert at least 40% of the accumulated pension wealth into an annuity, and up to 60% can be taken as a tax-free lump sum. That single 40/60 rule shapes every drawdown decision that follows, so this guide walks through the exit rules confirmed on the PFRDA exits FAQ, the tax treatment under the Income Tax Act, and a multi-year worked example comparing an annuity against a systematic withdrawal plan.

The comparison at the heart of this piece is annuity versus SWP: both are ways of turning a lump sum into a monthly income, but one locks in a rate for life while the other keeps your capital invested. You can model both side by side on our annuity vs SWP calculator, and estimate your age-60 corpus first on the NPS calculator.

The Scheme Explained

The NPS All Citizen Model (also called the individual or "All Citizens of India" model) lets any resident aged 18 to 70 open a Tier I retirement account. Exit is governed by three trigger points, and the annuity floor differs at each. At superannuation, defined as age 60, PFRDA requires a "Minimum of 40% of accumulated pension wealth" to buy a monthly annuity, with the "Remaining 60%" paid as lump sum. Crucially, if your corpus is Rs 5 lakh or less at 60, you may withdraw the entire amount with no compulsory annuity at all.

Premature exit, meaning any exit before age 60, is permitted only after you have "subscribed to NPS for at least a minimum period of five years". Here the annuity floor is far higher: a "Minimum of 80% of accumulated pension wealth" must be annuitised and only the "Remaining 20%" is paid out. The full-withdrawal escape hatch is also lower, at Rs 2.5 lakh or less. This asymmetry, 40% versus 80%, is deliberate: the scheme rewards those who stay invested to superannuation and discourages early exits by shrinking the accessible lump sum from 60% to 20%.

A third option, deferment, is often overlooked. A subscriber "will continue to remain subscribed to the NPS upto the age of 75 (seventy-five) years", and both the lump-sum withdrawal and the annuity purchase can be deferred within that window, with the freedom to exit "at any point of time during the deferment period". That means a healthy 60-year-old who does not need the money immediately can keep the corpus compounding for up to 15 more years before drawing it down. The table below summarises the three exit routes.

The annuity itself is bought from an IRDAI-registered life insurer empanelled by PFRDA, and the annuity rate, unlike the small-savings rates such as PPF at 7.1% for the July-September 2026 quarter, is set by the insurer rather than the government. Annuity rates vary by the option chosen (life annuity, joint-life, return of purchase price) and by the annuitant's age, so the pension figure is never a fixed statutory number.

Tax on Withdrawal

NPS is one of the few Indian instruments that has reached exempt-exempt-exempt status on the lump-sum leg. Under Section 10(12A) of the Income Tax Act, the payment received on closure or opting out is exempt "to the extent it does not exceed sixty per cent of the total amount payable". Because the age-60 lump sum is capped at exactly 60% of the corpus, the entire lump sum is tax-free. On a premature exit the lump sum is only 20% of the corpus, comfortably inside the 60% ceiling, so that too is fully exempt under the same section.

The 40% (or 80% on premature exit) routed into the annuity is not taxed at the point of purchase, but the monthly pension it generates is taxable as income in the year of receipt, at your slab rate. This is where drawdown planning matters: annuity income stacks on top of any other income. Under the new regime for FY 2025-26, the Section 87A rebate rises to Rs 60,000 and covers total income up to Rs 12,00,000, so a retiree whose annuity plus other income stays within Rs 12 lakh pays no tax at all. The old regime keeps its narrower rebate of Rs 12,500 up to Rs 5,00,000.

Partial withdrawals during the accumulation phase are treated separately. Section 10(12B) exempts a partial withdrawal of up to 25% of the subscriber's own contributions, so the pre-retirement liquidity NPS allows is also tax-free within that limit. The table below sets out the treatment of each leg.

Two contribution-side reliefs are worth stating precisely, because they behave differently across regimes. Section 80CCD(1B) is NOT allowed in the new regime: the additional deduction of up to Rs 50,000 can be claimed only under the old regime. By contrast, the employer contribution deduction under Section 80CCD(2), which our recent explainer on NPS for corporates covers in detail, is available in both the old and new regimes. Details of these provisions are published on incometax.gov.in.

Worked Drawdown

Take a subscriber who reaches age 60 in 2026 with an accumulated corpus of Rs 1,00,00,000. Applying the statutory 40/60 split, at least Rs 40,00,000 must buy an annuity and up to Rs 60,00,000 can be drawn as a tax-free lump sum under Section 10(12A). At an illustrative annuity rate of 6.5% on a life-annuity-with-return-of-purchase-price option, the Rs 40,00,000 generates about Rs 2,60,000 a year, or roughly Rs 21,667 a month, taxable at slab. Because that pension sits well under the Rs 12,00,000 rebate threshold, a retiree with no large other income pays no tax on it in the new regime.

Now consider the Rs 60,00,000 lump sum. Rather than annuitise more, the subscriber deploys it in a balanced portfolio and runs a systematic withdrawal plan of Rs 4,00,000 a year, an initial withdrawal rate of 6.67%. Assuming an illustrative 8% annual return, the corpus behaves as follows over the first five years.

Because the 8% return exceeds the 6.67% withdrawal, the lump sum actually grows to about Rs 64,69,328 after five years despite paying out Rs 20,00,000 in total. That is the structural advantage of an SWP over an annuity: the capital stays yours and keeps working, whereas an annuity trades that upside for a guaranteed cheque. The trade-off is sequence-of-returns risk. If markets fell 8% in year one instead of rising, the closing balance would drop to roughly Rs 51,20,000, and a run of poor early years can erode a corpus that a fixed annuity would have protected. You can stress-test both paths on the retirement drawdown calculator.

Tax also differs by path. The annuity's Rs 2,60,000 is fully taxable as slab income each year. The SWP, if run from an equity-oriented fund, is taxed only on the capital-gains component of each redemption: long-term gains above Rs 1,25,000 a year are taxed at 12.5% under the Budget 2024 rules. In the year-one redemption of Rs 4,00,000, only the embedded gain, not the whole Rs 4,00,000, is in the tax net, and the first Rs 1,25,000 of LTCG is exempt, so the effective tax on an SWP is frequently lower than on the equivalent annuity.

A premature-exit example shows the opposite pull. A subscriber exiting at age 50 with a Rs 20,00,000 corpus after seven years in the scheme must annuitise 80%, or Rs 16,00,000, and receives only Rs 4,00,000 as a tax-free lump sum. The lump sum is exempt under Section 10(12A), but the drawdown flexibility is gone: the bulk of the money is locked into an annuity for life. This is why exiting NPS before 60 is rarely optimal unless the corpus is Rs 2,50,000 or less, in which case the entire amount can be withdrawn.

Annuity versus SWP: matching the split to your needs

The 40% minimum annuity is a floor, not a target. A subscriber who values certainty above all can annuitise the full 100% and receive a larger guaranteed pension; one who wants control and inheritance can annuitise the bare 40% and manage the other 60% actively. The decision hinges on three factors: your other guaranteed income, your health and life expectancy, and whether you want to leave a legacy, since a standard life annuity pays nothing to heirs unless you pick the return-of-purchase-price option.

For a retiree with no other pension, buying more annuity than the 40% floor can be sensible because it covers non-negotiable monthly expenses with a cheque that never depends on markets. For a retiree who already has EPF, rental or spousal income, keeping the 60% in an SWP preserves growth and liquidity. The table below frames the choice.

FAQ

How much of my NPS corpus can I take as a lump sum at 60?

Up to 60% of the accumulated pension wealth is paid as a lump sum at superannuation, and at least 40% must be used to buy an annuity, per the PFRDA All Citizen Model exit rules. If your total corpus is Rs 5,00,000 or less, you may withdraw 100% with no compulsory annuity.

Is the NPS lump sum taxable?

No. Under Section 10(12A) of the Income Tax Act, the lump sum is exempt to the extent it does not exceed 60% of the total amount payable. Since the age-60 lump sum is capped at 60%, the entire amount is tax-free. The annuity income you receive afterwards is taxable at your slab rate.

What are the rules if I exit NPS before age 60?

Premature exit is allowed after a minimum of five years in the scheme. You must annuitise at least 80% of the corpus and can withdraw only 20% as a lump sum. If the corpus is Rs 2,50,000 or less, the whole amount can be withdrawn without annuitisation.

Can I delay buying the annuity after I turn 60?

Yes. You can defer both the lump-sum withdrawal and the annuity purchase and remain subscribed up to age 75, exiting at any point during that deferment period. This lets the corpus keep compounding if you do not need the income immediately.

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

No. Section 80CCD(1B) is NOT allowed in the new regime: the additional Rs 50,000 deduction can be claimed only under the old regime. The employer-contribution deduction under Section 80CCD(2), however, is available in both the old and new regimes.

Should I choose an annuity or an SWP for my NPS lump sum?

An annuity gives a guaranteed lifelong pension but no access to capital and no legacy unless you pick return-of-purchase-price. An SWP keeps the capital invested and often taxes withdrawals at 12.5% LTCG rather than slab, but carries market risk. Model both on the annuity vs SWP calculator before deciding.