NPS at 60: why 40% of your corpus must buy an annuity and 60% comes as tax-free lump sum

A subscriber who reaches 60 with Rs 1 crore in a National Pension System Tier I account does not get to decide what happens to all of it. The Pension Fund Regulatory and Development Authority fixes the split first: a minimum of 40% of accumulated pension wealth must be converted into a monthly annuity, and up to the remaining 60% is paid out in cash. That 40/60 line is the most consequential single rule in Indian retirement planning.

PFRDA's exit FAQs for the All Citizen Model put it plainly: a 'minimum of 40% of accumulated pension wealth will be utilized for monthly annuity or pension', with the 'remaining 60% of accumulated pension wealth' paid to the subscriber. There is one exemption, and it is a size test rather than a choice — a subscriber whose accumulated pension wealth is 'equal to or less than a sum of five lakh rupees' may withdraw the entire balance without buying any annuity at all.

The Scheme Explained

Tier I is the account the exit rule attaches to, and attaining the age of 60 is the normal exit event under the All Citizen Model. The 40% figure is a floor rather than a ceiling. A subscriber who wants more guaranteed income may annuitise 50%, 70% or the whole corpus; what nobody with a corpus above five lakh rupees may do is annuitise less than 40%. The decision runs one way only, because once the annuity is bought the capital is gone into the contract.

The 60% side is the part most households actually plan around, and it is the part the Income-tax Act 1961 treats most generously. Section 10(12A) exempts payment from the NPS Trust on closure of the account to the extent it does not exceed sixty per cent of the total amount payable, which is why a Rs 1 crore corpus releases Rs 60 lakh with no tax event on the withdrawal itself.

Exiting early flips the ratio hard. PFRDA permits voluntary exit before 60 only where the subscriber has 'subscribed to NPS for at least a minimum period of five years', and on that route a 'minimum of 80% of accumulated pension wealth will be utilized for monthly annuity or pension', with the 'remaining 20%' paid out. The full-withdrawal threshold also falls, from five lakh rupees to 'two lakh fifty thousand rupees'. In cash terms, the same Rs 1 crore corpus that releases Rs 60 lakh at 60 would release only Rs 20 lakh at 58.

There is a third option that neither annuitises nor pays out immediately. PFRDA allows a subscriber to 'defer the withdrawal of the lump sum amount' and, separately, to 'defer the purchase of annuity', each 'upto the age of seventyfive years', on a request submitted 'fifteen days prior to attaining the age of 60 years'. Deferment is closed to anyone who instead exercises continuation, which keeps the subscriber contributing and invested up to the age of 75. The two are alternatives, not a menu to combine.

The row that decides most outcomes is the first one, and the number that decides the rest is Rs 5 lakh. Below that line the annuity requirement disappears entirely; a rupee above it and 40% of the whole corpus, not 40% of the excess, is committed to an annuity contract. A subscriber sitting at Rs 5.2 lakh at 59 is therefore in a materially different position from one at Rs 4.9 lakh, and that gap is worth modelling through Oquilia's NPS calculator before the birthday rather than after it, alongside the glossary entries on NPS and corpus.

Tax on Withdrawal

The lump sum is the cleanest part of the tax picture. Section 10(12A) of the Income-tax Act 1961 exempts 'any payment from the National Pension System Trust to an assessee on closure of his account or on his opting out of the pension scheme referred to in section 80CCD, to the extent it does not exceed sixty per cent of the total amount payable to him at the time of such closure or his opting out of the scheme'. Take the maximum 60% and the whole of it sits inside the exemption.

The 40% that buys the annuity is not taxed at the moment of purchase either. Section 80CCD provides that the assessee 'shall be deemed not to have received any amount in the previous year if such amount is used for purchasing an annuity plan in the same previous year'. The Rs 40 lakh moving out of a Rs 1 crore corpus into an annuity contract is therefore not a taxable receipt in the year of exit.

The tax arrives later, on the pension. Section 80CCD(3) provides that where an amount standing to the credit of the assessee is received by the assessee or the nominee, 'the whole of the amount... shall be deemed to be the income of the assessee or his nominee... and shall accordingly be charged to tax as income of that previous year'. Every monthly annuity payment is ordinary taxable income at the subscriber's slab, for as long as the annuity runs.

Partial withdrawals taken during the working years have their own clause. Section 10(12B) exempts a partial withdrawal 'to the extent it does not exceed twenty-five per cent of the amount of contributions made by him'. The 25% is measured against the subscriber's own contributions, not the account balance, which is a far smaller base than most assume.

One accumulation-side deduction is worth naming because it changes who reaches 60 with what. Section 80CCD(1B) allows a deduction that 'shall not exceed fifty thousand rupees' for contributions to a notified pension scheme. Section 80CCD(1B) is not allowed in the new regime; the Rs 50,000 deduction survives only in the old regime, so a subscriber who switched to the new regime during the accumulation years will have claimed nothing under it.

There is a wrinkle in the five lakh rule that deserves flagging rather than glossing. Section 10(12A) caps the exemption at sixty per cent of the total amount payable. A subscriber who takes 100% of a Rs 4.8 lakh corpus under PFRDA's full-withdrawal route is drawing Rs 4.8 lakh, while sixty per cent of that total is Rs 2.88 lakh. Read literally, the balance of Rs 1.92 lakh falls outside the words of the clause. Anyone exiting on the small-corpus route should get the treatment confirmed before filing rather than assuming the whole payment is exempt.

Worked Drawdown

Take a subscriber who turns 60 on 16 September 2026 with a Tier I corpus of exactly Rs 1 crore. The corpus figure is an assumption for the illustration; the split that follows is not. PFRDA's floor commits Rs 40 lakh to an annuity and releases Rs 60 lakh in cash. Oquilia's glossary entry on annuities puts prevailing Indian annuity rates in a 5% to 7% band, so the illustration below uses 6% as a mid-band assumption and shows the two edges alongside it.

At 6%, Rs 40 lakh produces Rs 2,40,000 a year, or Rs 20,000 a month before tax. At the 5% edge the same Rs 40 lakh yields Rs 2,00,000 a year, about Rs 16,667 a month. At 7% it yields Rs 2,80,000 a year, about Rs 23,333 a month. The spread between those edges is Rs 80,000 a year for life, the largest variable the subscriber still controls at exit.

The Rs 60 lakh lump sum can then be deployed into the guaranteed-income schemes whose rates the Finance Ministry left unchanged for the Jul-Sep 2026 quarter. Rs 30 lakh into the Senior Citizens Savings Scheme at 8.2% pays Rs 2,46,000 a year. Rs 15 lakh into the Post Office Monthly Income Scheme at 7.4% pays Rs 1,11,000 a year, or Rs 9,250 a month. The remaining Rs 15 lakh is left unallocated in this illustration, because no assumed rate for it would be verifiable.

Rs 5,97,000 a year is Rs 49,750 a month before tax, from Rs 85 lakh of the corpus, with Rs 15 lakh still liquid. The annuity contributes only Rs 2,40,000 of that, which is the uncomfortable arithmetic at the centre of the 40% rule: the compulsory slice is the lowest-yielding one in the table, and it is the only slice whose capital the subscriber can never get back.

Worked on the new-regime slab structure recorded in Oquilia's rate configuration for FY 2025-26, that Rs 5,97,000 attracts 5% on the band from Rs 4,00,000 to Rs 5,97,000, which is Rs 9,850. The Section 87A rebate in the new regime runs up to Rs 60,000 for total income up to Rs 12,00,000, so the liability is extinguished and the retiree pays nothing. Readers should confirm the slab structure for the year they actually retire in before relying on that figure.

Two Oquilia calculators model the trade-off directly. The annuity versus SWP calculator compares the compulsory annuity against a systematic withdrawal plan on the released 60%, and the retirement drawdown calculator tests how long the unallocated slice survives at different withdrawal rates.

Where the 60% Lump Sum Can Go

The destinations that matter most for a 60-year-old are the small-savings schemes, and their rates are currently stable. The Senior Citizens Savings Scheme pays 8.2% and the Post Office Monthly Income Scheme 7.4%, both unchanged for Jul-Sep 2026; the Public Provident Fund pays 7.1% on the same quarterly notification. Oquilia's coverage works the SCSS numbers from a Rs 30 lakh holding at 8.2% and the POMIS numbers from a Rs 15 lakh holding at 7.4%, and both can be re-run through the SCSS calculator and the POMIS calculator.

The wider rate backdrop is a holding pattern. The Reserve Bank of India's Monetary Policy Committee left the repo rate at 5.25% on 5 August 2026, a unanimous vote and the fourth consecutive pause of 2026, with the next review scheduled for 5 to 7 October 2026. The Finance Ministry has left small-savings rates unchanged for nine straight quarters as of the 16 July 2026 verification.

Most subscribers reach 60 with more than the NPS corpus in hand. Gratuity arrives at the same time, and the exemption ceiling under Section 10(10) is Rs 20 lakh after the Finance Act 2018 amendment, which the gratuity calculator applies; the EPF balance alongside it earned 8.25% for FY 2025-26.

The risk the 40/60 split quietly concentrates is reinvestment risk on the 60%. The annuity locks a rate for life on Rs 40 lakh, while SCSS at 8.2% and POMIS at 7.4% are quarterly-notified rates that must be rolled over at whatever the notification says on maturity. Deferring the lump sum to as late as age 75, which PFRDA expressly permits, keeps that decision open.

FAQ

How much of my NPS corpus must buy an annuity at 60?

A minimum of 40% of accumulated pension wealth, per PFRDA's exit rules for the All Citizen Model. The remaining 60% is paid as a lump sum. The 40% is a floor, so a subscriber may choose to annuitise more, up to the whole corpus, but never less while the corpus exceeds five lakh rupees.

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

Yes, within the statutory limit. Section 10(12A) of the Income-tax Act 1961 exempts the payment from the NPS Trust on closure of the account to the extent it does not exceed sixty per cent of the total amount payable. A lump sum taken at exactly the 60% maximum falls entirely inside that ceiling.

What happens if my NPS corpus is Rs 5 lakh or less?

PFRDA permits complete withdrawal without annuitisation where accumulated pension wealth is equal to or less than five lakh rupees. Section 10(12A) still caps the exemption at sixty per cent of the total amount payable, so the treatment of the portion above that 60% should be confirmed before filing.

Can I delay buying the annuity after I turn 60?

Yes. PFRDA allows a subscriber to defer the withdrawal of the lump sum and to defer the purchase of the annuity, each up to the age of 75, on a request submitted 15 days before attaining 60. Deferment is not available to a subscriber who instead opts for continuation, which keeps the account subscribed up to age 75.

How is the monthly annuity pension taxed?

At slab, in the year of receipt. Section 80CCD(3) deems the amount received to be the income of the assessee or the nominee and charges it to tax as income of that previous year. On the worked example above, Rs 2,40,000 a year of annuity income forms part of a Rs 5,97,000 total that the Section 87A rebate of up to Rs 60,000 extinguishes in the new regime.

What changes if I exit before 60?

The ratio reverses. Premature exit requires at least five years of subscription, commits a minimum of 80% of accumulated pension wealth to an annuity and pays out the remaining 20%, and the full-withdrawal threshold drops from five lakh rupees to Rs 2.5 lakh. On a Rs 1 crore corpus that is Rs 20 lakh in cash instead of Rs 60 lakh.