NPS subscriber dies after taking the lump sum but before the annuity is issued: who gets the annuity money

A National Pension System (NPS) exit is normally a two-step event: the subscriber takes the permitted lump sum, and the balance is used to buy an annuity from an Annuity Service Provider (ASP). Occasionally the subscriber dies in the gap between those two steps, after the lump sum has been credited but before the annuity policy is issued. The money meant for the annuity is then left sitting in the Central Recordkeeping Agency (CRA) system with no annuitant. The Pension Fund Regulatory and Development Authority (PFRDA) settled who gets that money in Circular PFRDA/2022/27/ASP-EXIT/01 dated 19 October 2022, issued under the PFRDA (Exits and Withdrawals under NPS) Regulations, 2015 (circular on pfrda.org.in). It also directs the NPS Trust to monitor and push the timely processing of such pending death claims.

The answer depends on one question above all: was the subscriber in the Government Sector, or in the All Citizen or Corporate model? This guide walks through both routes of the 2022 circular, the tax position at each stage, and a worked multi-year example of how the annuity money moves through a family.

The Scheme Explained

How a normal NPS exit splits the corpus

Under the PFRDA (Exits and Withdrawals under the NPS) (Amendment) Regulations, 2025, and the PFRDA press release of 19 December 2025, the split at normal exit depends on the subscriber's sector and corpus size.

So a government-sector subscriber with a Rs 50 lakh corpus would ordinarily take up to Rs 30 lakh (60%) as a lump sum and leave at least Rs 20 lakh (40%) for the annuity. A corporate subscriber with the same Rs 50 lakh could take up to Rs 40 lakh (80%) and leave at least Rs 10 lakh (20%). It is that second slice, the Rs 20 lakh or Rs 10 lakh, that the 19 October 2022 circular deals with when the subscriber dies before the annuity is issued.

You can model your own split on the Oquilia NPS calculator, and our glossary entries on the NPS and on an annuity explain the underlying terms.

Route 1: Government Sector subscribers

For a Government Sector subscriber, the annuity money is not simply handed over as cash. PFRDA's circular lays down a sequence of beneficiaries, and each one is tied to a specific annuity design:

1. Spouse first. The spouse, if any, must buy a life annuity with return of purchase price (ROP). The spouse receives the annuity income for life.
2. Then the living dependent mother. On the spouse's death, the annuity is re-issued to the living dependent mother, using the returned purchase price and at the premium rate prevalent at the time of the original purchase.
3. Then the living dependent father. If the mother is not alive or not dependent (or on her death), the annuity is re-issued on the same terms to the living dependent father.
4. Then the children. After that, the purchase price is paid to the surviving children.
5. Finally, legal heirs. If there are no surviving children, the purchase price goes to the other legal heirs.

Two features of the 2022 circular stand out. First, the ROP design means the original purchase price is never consumed; it is handed down at each stage. Second, the re-issue happens "at the premium rate prevalent at purchase", so a dependent parent is not exposed to whatever annuity rates happen to be on offer years later.

Route 2: All Citizen and Corporate subscribers

For All Citizen and Corporate model subscribers, the circular is far simpler. The entire accumulated pension wealth is paid to the nominees or, if there is no valid nomination, to the legal heirs. The nominees may opt to buy an annuity, but they are not required to.

In this route, under the 19 October 2022 circular, a valid nomination decides who is paid when the claim is settled.

Tax on Withdrawal

The 2022 circular is a payout rule, not a tax rule, so the tax position has to be read from the Income-tax Act, 1961. The Income Tax Department's portal at incometax.gov.in is the authoritative reference for current provisions. Three points can be stated with confidence from Oquilia's verified rate data.

The subscriber's own lump sum

The lump sum the subscriber received before death is governed by Section 10(12A), which exempts up to 60% of the corpus withdrawn at exit. A government-sector subscriber who took exactly 60% therefore had a fully exempt lump sum. A non-government subscriber who took the maximum 80% would have 60% exempt, and the remaining 20% of the corpus taxable at slab rates in the year of receipt. Separately, partial withdrawals of up to 25% of own contributions while in service fall under Section 10(12B).

Annuity income received by the spouse or a dependent parent

Annuity income is taxed in the recipient's hands at their applicable slab rate. Under the new tax regime for FY 2025-26, the slabs are:

Health and education cess of 4% is added to the tax. The Section 87A rebate under the new regime is up to Rs 60,000 where taxable income does not exceed Rs 12 lakh, which in practice means a surviving spouse whose total slab income stays at or under Rs 12 lakh pays no income tax.

Money paid to nominees and heirs

The circular does not itself say how the accumulated pension wealth paid to an All Citizen or Corporate nominee, or the purchase price returned to children, is taxed. Oquilia has not verified a specific provision for these receipts against the official record, so we do not state one here. Families should confirm the position on incometax.gov.in or with a tax practitioner before filing.

Worked Drawdown

The figures below are illustrative. Corpus sizes and splits follow the 2025 exit regulations quoted above; the 6% annual annuity rate is an assumption for arithmetic only, because actual ROP annuity rates vary by ASP, by age and by date of purchase. Run your own numbers on the annuity vs SWP calculator and the retirement drawdown calculator.

Example A: a Government Sector subscriber

Ramesh (an illustrative name) retires from a government job with an NPS corpus of Rs 50 lakh. He takes the maximum 60% lump sum of Rs 30 lakh, which is fully exempt under Section 10(12A). The remaining 40%, Rs 20 lakh, is earmarked for the annuity. Before the ASP issues the policy, he dies.

Stage 1 - the spouse. His wife must buy a life annuity with ROP using the Rs 20 lakh. At the assumed 6%, that pays Rs 1,20,000 a year, or Rs 10,000 a month.

Stage 2 - the dependent mother. Suppose his wife dies after 10 years. Under ROP, the Rs 20 lakh purchase price is returned and the annuity is re-issued to Ramesh's living dependent mother, at the premium rate prevalent at the original purchase. She too receives Rs 1,20,000 a year.

Stage 3 - the children. Suppose his mother dies 6 years later and his father is no longer alive. The Rs 20 lakh purchase price is then paid to the surviving children.

Over 16 years, the family receives Rs 19.2 lakh in annuity income and still gets the full Rs 20 lakh capital back at the end, a total of Rs 39.2 lakh from the Rs 20 lakh left in the CRA system. That is the practical effect of the ROP requirement in the 2022 circular.

The tax on each stage, new regime FY 2025-26

If the spouse's only income is the Rs 1,20,000 annuity, it sits entirely in the nil band up to Rs 4 lakh, so the tax is zero.

If she also has Rs 9 lakh of other slab income, her total is Rs 10.2 lakh. The slab tax works out to Rs 20,000 on the Rs 4-8 lakh band plus Rs 22,000 (10% of Rs 2.2 lakh) on the Rs 8-10.2 lakh band, Rs 42,000 in all. Because total income is under Rs 12 lakh, the Section 87A rebate of up to Rs 60,000 wipes it out, and the tax payable is nil.

If instead her total slab income is Rs 13 lakh, the slab tax is Rs 20,000 + Rs 40,000 + Rs 15,000 (15% of Rs 1 lakh) = Rs 75,000. With 4% cess of Rs 3,000, the bill is Rs 78,000, and the 87A rebate is not available because income exceeds Rs 12 lakh. Keep the nomination on the PRAN current and back it with a will; Oquilia's will maker covers the basics.

Example B: a Corporate subscriber

Priya (an illustrative name) is a Corporate model subscriber with a Rs 50 lakh corpus. She takes the maximum 80% lump sum of Rs 40 lakh. Of that, 60% of the corpus (Rs 30 lakh) is exempt under Section 10(12A), and the other Rs 10 lakh is taxable in her hands. The remaining 20%, Rs 10 lakh, waits in the CRA system for the annuity. She dies before the annuity is issued.

Under the 2022 circular, the entire accumulated pension wealth, here the Rs 10 lakh annuity portion, is paid to her nominee. The nominee may buy an annuity, but does not have to. The table compares two choices the nominee could make with that Rs 10 lakh, using the same assumed 6% rate for the annuity and an assumed 6% return for a systematic withdrawal plan drawing Rs 60,000 a year.

At a withdrawal equal to the assumed return, the two options look identical on paper over 10 years; the difference is that the annuity rate is fixed for life while market returns are not. The choice, unlike in the government route, is entirely the nominee's.

FAQ

What happens to NPS money if the subscriber dies after taking the lump sum but before the annuity is issued?

Under PFRDA Circular PFRDA/2022/27/ASP-EXIT/01 dated 19 October 2022, the annuity money left in the CRA system goes to the family. For Government Sector subscribers, the spouse must buy a life annuity with return of purchase price. For All Citizen and Corporate subscribers, the entire accumulated pension wealth is paid to nominees or legal heirs.

Can the spouse of a government employee take the annuity amount as cash?

No. The 2022 circular requires the spouse of a Government Sector subscriber to purchase a life annuity with return of purchase price. Cash only reaches the family at the end of the chain, when the purchase price is paid to surviving children or, failing them, other legal heirs.

Who gets the annuity after the spouse dies?

The annuity is re-issued, using the returned purchase price and at the premium rate prevalent at the original purchase, first to the living dependent mother and then to the living dependent father. After them, the purchase price goes to the surviving children, or failing them to other legal heirs.

Does a corporate NPS nominee have to buy an annuity?

No. For All Citizen and Corporate model subscribers, the circular says the entire accumulated pension wealth is paid to nominees or legal heirs, who may opt to purchase an annuity. A Rs 10 lakh balance, for example, can be taken in full.

Is the annuity received by the spouse taxable?

Yes, annuity income is taxed at the recipient's slab rate. Under the new regime for FY 2025-26, income up to Rs 4 lakh is in the nil band, and the Section 87A rebate of up to Rs 60,000 means no tax is payable where total taxable income does not exceed Rs 12 lakh.

Is the lump sum the subscriber already received taxed again?

No. The lump sum was the subscriber's receipt at exit, and up to 60% of the corpus is exempt under Section 10(12A). Any taxable part above 60% belonged to the subscriber's income for that year and would be reported in the subscriber's final return.

Sources: PFRDA Circular PFRDA/2022/27/ASP-EXIT/01, "Handling NPS corpus of deceased Subscribers meant for purchase of Annuity", 19 October 2022 (PDF on pfrda.org.in); PFRDA (Exits and Withdrawals under the NPS) (Amendment) Regulations, 2025; Income-tax Act, 1961. This article is general information, not personal financial or tax advice.