Leaving NPS before 60: why premature exit forces four-fifths of your corpus into a lifelong annuity

The National Pension System changed its exit rulebook on 19 December 2025, when the Pension Fund Regulatory and Development Authority (PFRDA) notified the Exits and Withdrawals (Amendment) Regulations, 2025 (the underlying regulations were last amended on 16 December 2025). For a private-sector subscriber who wants out before turning 60, the headline is stark: you may take only 20% of your accumulated corpus as a lump sum, and at least 80% must buy an annuity. That is the mirror image of the normal exit at 60, where up to 80% is now cash. The one relief for early leavers is that the old five-year minimum lock-in for premature exit has been removed entirely.

This piece compares premature exit before 60 against normal exit at 60 for the same corpus, sets out the tax treatment under sections 10(12A) and 10(12B) of the Income-tax Act, and works a multi-year drawdown so you can see, rupee by rupee, what leaving early actually costs. All figures are drawn from PFRDA's own before/after table in the 19 December 2025 press release and from Oquilia's rate register; where a return is assumed for a worked example, it is flagged as illustrative.

The Scheme Explained

The NPS is a defined-contribution pension account regulated by PFRDA under the PFRDA Act, 2013. The 2025 amendment applies to the non-government sector, meaning the All Citizen Model and the Corporate Sector; it does not touch the government sector, which stays at 60% lump sum and 40% annuity. Two exit routes matter for retirement planning: normal exit, on or after age 60, and premature exit, before 60. You can model both against your own numbers with the NPS calculator.

Under the amended rules, normal exit for a non-government subscriber allows up to 80% of the corpus as a lump sum with at least 20% used to purchase an annuity, an improvement on the old 60/40 split. Where the corpus is Rs 8 lakh or less, the whole amount can be taken as a lump sum. Between Rs 8 lakh and Rs 12 lakh, up to Rs 6 lakh may be taken as cash with the balance placed in Systematic Lump-sum Withdrawal (SLW) for a minimum of six years or converted to annuity. Above Rs 12 lakh, the 80/20 rule applies.

Premature exit, before age 60, is far more restrictive: up to 20% of the corpus as a lump sum, with at least 80% compulsorily annuitised. The full corpus can be withdrawn as a lump sum only where it is Rs 5 lakh or less, a threshold raised from the earlier Rs 2.5 lakh on 19 December 2025. Critically, the previous requirement to stay invested for at least five years before a premature exit was removed by the same amendment, so an early leaver is no longer forced to wait out a lock-in, though the 80% annuity condition still bites.

The table below sets the two routes side by side for a non-government subscriber, using PFRDA's notified figures dated 19 December 2025.

The amendment also loosened three long-standing frictions. The maximum entry and exit age both rose to 85, from 70 for entry and 75 for exit, so a subscriber can now join later and defer withdrawal much further. The 15-day prior-intimation requirement for continuation or deferment of the account was dropped. And partial withdrawal, which lets you draw on your account without exiting, was widened, as the next paragraph explains.

Partial withdrawal still caps out at 25% of the subscriber's own contributions, excluding the employer's share and all investment returns, and is still available only after three years in the scheme. What changed on 19 December 2025 is frequency: you may now make partial withdrawals up to four times before age 60, subject to a minimum four-year gap between them, and an uncapped number of times after 60 with a minimum three-year gap. The list of permitted purposes was also revised, and understanding a term such as your corpus matters because the withdrawal is measured against contributions, not the full balance.

The permitted purposes now cover higher education or marriage of children; purchase or construction of a house, clarified as a one-time facility; medical treatment or hospitalisation for self, spouse, children or parents, broadened so that there is no longer a specified-illness list; disability; and a new purpose, settlement of a financial obligation taken from a regulated financial institution against a lien or charge on the NPS account. Two grounds that previously qualified were withdrawn from the list on 19 December 2025, narrowing the reasons for which an early draw can be made.

Tax on Withdrawal

The tax treatment of an NPS exit turns on which slice you are looking at. The lump-sum portion is exempt from tax up to 60% of the total corpus under section 10(12A) of the Income-tax Act, 1961. Because normal exit now permits an 80% lump sum, the slice between 60% and 80% is not covered by the 10(12A) exemption, a subtlety that only became live once PFRDA raised the cash ceiling to 80% on 19 December 2025; subscribers should confirm the exact treatment of the excess with the CBDT position before drawing it.

The annuity you are compelled to buy, whether 20% at normal exit or 80% at premature exit, is not taxed at the point of purchase, but the pension it later pays is fully taxable as income in the year of receipt at your applicable slab. Under the new tax regime for FY 2025-26, the slabs run from nil up to Rs 4 lakh, 5% from Rs 4 lakh to Rs 8 lakh, 10% from Rs 8 lakh to Rs 12 lakh, and higher rates thereafter, with a section 87A rebate of up to Rs 60,000 making income up to Rs 12 lakh effectively tax-free. That rebate materially softens the tax on a modest annuity for a retiree with little other income.

Partial withdrawals sit in a different box: they remain tax-exempt under section 10(12B) of the Income-tax Act, so drawing 25% of your own contributions for one of the permitted purposes carries no tax cost. Contributions themselves attract the section 80CCD deductions during the accumulation phase, but note that the additional Rs 50,000 deduction under section 80CCD(1B) is available only under the old tax regime and cannot be claimed in the new regime, a distinction that changes the real cost of building the corpus in the first place.

The annuity income is taxed as ordinary income, not as a capital gain, so the 12.5% long-term capital gains rate that applies to listed equity above the Rs 1.25 lakh annual exemption is irrelevant to the pension stream itself. That distinction matters when you are weighing an NPS annuity against holding equity mutual funds and running a systematic withdrawal, a comparison you can test with the annuity versus SWP calculator.

Worked Drawdown

Consider Anjali, a private-sector subscriber in the All Citizen Model with an NPS corpus of Rs 40 lakh, weighing a premature exit at age 52 against staying invested until 60. The arithmetic below uses the PFRDA splits notified on 19 December 2025 and an illustrative 6% annual annuity rate purely to translate the annuity corpus into a monthly figure; the actual rate depends on the annuity service provider chosen at purchase.

If Anjali exits early at 52, the premature rules force 80% into annuity. Her Rs 40 lakh splits into a Rs 8 lakh lump sum (20%) and a Rs 32 lakh annuity corpus (80%). At the illustrative 6% rate, that Rs 32 lakh buys roughly Rs 16,000 a month before tax, and she has only Rs 8 lakh of cash in hand. Because her corpus exceeds Rs 5 lakh, she cannot take the whole amount as cash.

If instead she waits until 60, the normal-exit rules invert the split. Holding the figure at Rs 40 lakh for a like-for-like comparison, she may now take Rs 32 lakh (80%) as a lump sum and annuitise only Rs 8 lakh (20%). At the same illustrative 6% rate the Rs 8 lakh annuity yields about Rs 4,000 a month, but she controls Rs 32 lakh outright, which she can invest, ladder or draw down on her own terms.

The lesson is that the 80/20 versus 20/80 flip is the single largest lever in NPS drawdown planning, and it is entirely a function of whether you cross age 60 before exiting. Leaving eight years early converts Rs 24 lakh of would-be cash into a locked annuity stream. For a subscriber whose corpus is Rs 5 lakh or below, the calculus differs: premature exit permits the full amount as a single lump sum, so a small account is not trapped in a token annuity.

A retiree who does take the large lump sum at 60 then faces a self-managed drawdown problem: how much to withdraw each year without exhausting the capital. A common planning anchor is a withdrawal rate in the region of 4% a year adjusted for inflation, which on a Rs 32 lakh lump sum is about Rs 1.28 lakh in the first year; you can stress-test your own number against a chosen safe withdrawal rate and time horizon using the retirement drawdown calculator. The trade-off is real: the annuity guarantees income for life but at a fixed nominal figure, whereas the self-managed lump sum keeps flexibility and any upside at the cost of longevity and sequence risk.

For a subscriber still accumulating, the same amendment that raised the exit age to 85 also lets you defer the whole decision, keeping the corpus compounding rather than annuitising at 60. Whether that helps depends on your other income and your view on annuity rates, which is exactly the kind of scenario the drawdown tools are built to model against a fixed Rs 40 lakh or Rs 1 crore target.

FAQ

Can I still take my whole NPS corpus as cash if I exit before 60?

Only if your total corpus is Rs 5 lakh or less; that threshold was raised from Rs 2.5 lakh on 19 December 2025. Above Rs 5 lakh, a premature exit before age 60 permits a maximum 20% lump sum with at least 80% compulsorily used to purchase an annuity, per the PFRDA Exits and Withdrawals (Amendment) Regulations, 2025.

Was the five-year lock-in for premature exit really removed?

Yes. The earlier requirement to remain invested for at least five years before a premature exit was removed by the amendment notified on 19 December 2025. You may now exit before that period, but the 80% compulsory annuity condition still applies to any corpus above Rs 5 lakh.

Does the 80% lump sum rule apply to government employees?

No. The government sector is unchanged at 60% lump sum and 40% annuity as at 21 September 2026. The 80/20 normal-exit split and the 20/80 premature-exit split apply only to the non-government sector, meaning the All Citizen Model and the Corporate Sector. NPS-Lite is also unchanged at 60/40, with a full lump sum only up to a Rs 2 lakh corpus.

How is my NPS pension taxed after exit?

The monthly pension from the annuity is fully taxable as income at your slab rate in the year you receive it. Under the new tax regime for FY 2025-26, a section 87A rebate of up to Rs 60,000 keeps total income up to Rs 12 lakh effectively tax-free. The lump sum itself is exempt up to 60% of the corpus under section 10(12A).

How many times can I make a partial withdrawal now?

Up to four times before age 60, with a minimum four-year gap between withdrawals, and an uncapped number of times after 60 with a minimum three-year gap. Each withdrawal is limited to 25% of your own contributions, is available only after three years in the scheme, and is tax-exempt under section 10(12B).

What new reason can I cite for a partial withdrawal?

A new ground was added on 19 December 2025: settling a financial obligation taken from a regulated financial institution against a lien or charge on the NPS account. The full list also covers higher education or marriage of children, one-time house purchase or construction, medical treatment for self or family, and disability. Two grounds that previously qualified were withdrawn on the same date, narrowing the reasons for which an early draw is allowed.

Until what age can I now stay in NPS?

The maximum entry and exit age were both raised to 85, from 70 for entry and 75 for exit, under the 19 December 2025 amendment. The 15-day prior-intimation requirement for continuing or deferring the account was also removed, so a subscriber can keep the corpus invested well beyond 60 without the earlier notice formality.