PFRDA master circular spells out compliance advisories your NPS and APY agent must follow

On 14 January 2025 the Pension Fund Regulatory and Development Authority issued Master Circular Ref: PFRDA/Master Circular/2025/01/PoP-01, titled "Master Circular - Advisories to be followed by Point of Presence (PoPs) under NPS (All Citizen and Corporate) / NPS-Lite / APY" (pfrda.org.in). A Point of Presence (PoP) is the registered intermediary — usually your bank or broker — that enrols you, collects contributions and processes your exit. The circular consolidates, in one place, the conduct and service advisories a PoP must follow across four distinct products: the NPS All Citizen Model, the NPS Corporate Sector, NPS-Lite and the Atal Pension Yojana (APY).

The reason this matters for a retirement saver is that the same agent sells you two schemes that drain in completely opposite ways. The National Pension System (NPS) hands you a market-linked corpus that you split between a lump sum and a compulsory annuity at exit, whereas the Atal Pension Yojana pays a flat, government-guaranteed monthly pension for life. Picking the wrong one, or mis-reading the drawdown rules that the 14 January 2025 circular obliges your PoP to apply, is an expensive judgement to get wrong. This guide sets the two schemes side by side using only the figures PFRDA and the Income-tax Act actually publish.

The Scheme Explained

The NPS is governed for withdrawals by the PFRDA (Exits and Withdrawals under the NPS) (Amendment) Regulations, 2025, notified on 19 December 2025. For the non-government sector — that is, the All Citizen Model and the Corporate Sector — a subscriber reaching the normal exit age may now take up to 80% of the corpus as a lump sum and must use a minimum of 20% to buy an annuity. That 80/20 split is a change from the long-standing 60/40 rule and is the single most important number a PoP must now quote correctly.

The split is not the only lever. Under the same 2025 amendment, a non-government corpus of Rs 8,00,000 or less can be withdrawn 100% as a lump sum (or routed through Systematic Lump Sum Withdrawal), with no compulsory annuity. Between Rs 8,00,000 and Rs 12,00,000, the lump sum is capped at Rs 6,00,000 and the balance must fund an annuity or a systematic payout. The entry and exit ages were also widened: a subscriber may now join and exit the NPS up to age 85.

The government sector is treated differently, and your PoP is obliged under the 14 January 2025 circular to apply the right sector rule. Government-sector subscribers remain on the 60% lump sum / 40% annuity split, and NPS-Lite subscribers likewise stay at 60/40, with full lump-sum withdrawal allowed only up to a Rs 2,00,000 corpus. The table below sets out the three exit regimes.

Source: PFRDA (Exits and Withdrawals under the NPS) (Amendment) Regulations, 2025; PFRDA press release 19 December 2025.

A subscriber who wants to leave before the normal retirement age takes a harsher deal. On a premature exit from the non-government NPS, the position flips: a maximum of 20% comes out as a lump sum and at least 80% must annuitise, except that a small corpus of Rs 5,00,000 or less can be taken fully in cash. The 2025 amendment also removed the earlier five-year minimum lock-in for premature exit, so the restriction is now on the split, not the elapsed time. Before you model any of this, run your own numbers through the NPS calculator and read the plain-English definition in the NPS glossary entry.

The Atal Pension Yojana works on the opposite principle: you do not accumulate a visible corpus to split, you buy a defined pension. APY is open to Indian citizens aged 18 to 40, and the subscriber chooses a guaranteed monthly pension of Rs 1,000, Rs 2,000, Rs 3,000, Rs 4,000 or Rs 5,000, which begins at age 60 and continues for life. On the subscriber's death the same pension passes to the spouse, and on the death of both, the accumulated pension wealth is returned to the nominee. Since the Ministry of Finance notification effective 1 October 2022, anyone who is or has been an income-tax payer is barred from joining APY — a restriction that does not apply to the NPS. You can size the contribution for each pension slab with the Atal Pension Yojana calculator.

Tax on Withdrawal

Here is where the 14 January 2025 circular's insistence on correct PoP advice earns its keep, because PFRDA's withdrawal limit and the Income-tax Act's exemption limit no longer agree. Section 10(12A) of the Income-tax Act, 1961 exempts the NPS closure payment only "to the extent it does not exceed sixty per cent of the total amount payable" — a ceiling that has stood at 60% since 1 April 2020 (incometax.gov.in). PFRDA raised the non-government withdrawal limit to 80% on 19 December 2025, but a regulator has no power to amend the Income-tax Act.

The practical consequence is a divergence you must plan around: a non-government subscriber may now withdraw up to 80%, while Section 10(12A) clearly exempts only 60%. On the Rs 1 crore corpus modelled below, that is a Rs 20,00,000 slice between the 60% and 80% marks whose treatment does not follow automatically from Section 10(12A). Do not assume "80% is tax-free", and do not assume the 60%-80% slice is automatically taxable either — confirm the treatment of any withdrawal above 60% with your Annuity Service Provider and a tax adviser before you file the exit request. State the two limits as what they are: a withdrawal ceiling of 80% and an exemption ceiling of 60%.

The annuity leg is simpler. The 20% (or more) that buys an annuity is not taxed at the point of purchase, but every annuity instalment you then receive is taxable as income under your slab in the year of receipt, exactly like a pension. The same slab treatment applies to the monthly pension paid by APY from age 60. For the partial-withdrawal route that NPS allows during the accumulation phase, Section 10(12B) exempts up to 25% of the subscriber's own contributions — and here the tax limit and the PFRDA limit still match, so no divergence arises.

Note on the new regime: the Section 80CCD(1B) deduction of Rs 50,000 for voluntary NPS contributions is available only under the old tax regime — it is not available in the new regime. For FY 2025-26 the new-regime Section 87A rebate is up to Rs 60,000, which makes total income up to Rs 12,00,000 effectively tax-free before adding the standard deduction of Rs 75,000.

Worked Drawdown

Take a non-government (All Citizen) subscriber retiring at 60 with an NPS corpus of exactly Rs 1,00,00,000. The 19 December 2025 amendment gives two legitimate exit shapes, and the tax outcome diverges sharply between them.

Option A — the tax-clean 60/40 route. Withdraw Rs 60,00,000 as a lump sum, which sits entirely within the Section 10(12A) 60% exemption and is therefore clearly tax-exempt. The remaining Rs 40,00,000 buys an annuity, whose instalments are taxed at slab each year.

Option B — the new maximum 80/20 route. Withdraw Rs 80,00,000 as a lump sum and annuitise the minimum Rs 20,00,000. Of the Rs 80,00,000, only Rs 60,00,000 falls inside the 10(12A) exemption; the Rs 20,00,000 above the 60% line must have its treatment confirmed before withdrawal, as explained above. The annuity leg here is half the size of Option A, so your guaranteed lifelong income is smaller.

The multi-year picture is driven by the annuity leg, because that is the income that recurs. Suppose the retired subscriber in Option A has a total annual income — annuity instalments plus any other pension — of Rs 11,00,000 in each of the first several years. Under the FY 2025-26 new regime, taxable income of Rs 11,00,000 is below the Rs 12,00,000 threshold at which the Rs 60,000 Section 87A rebate fully extinguishes the liability, so the tax payable across those years is nil. If in a later year the same subscriber's income rises to Rs 14,00,000 (say, after adding rental income), it crosses the rebate threshold and is taxed under the slabs — 0% up to Rs 4,00,000, 5% to Rs 8,00,000, 10% to Rs 12,00,000 and 15% on the Rs 2,00,000 above — before the Rs 75,000 standard deduction is applied against salary or pension income.

Now compare the APY retiree. A subscriber who locked in the Rs 5,000 monthly slab receives Rs 60,000 a year, guaranteed by the Government of India, from age 60 for life, with the same amount continuing to the spouse and the accumulated pension wealth returning to the nominee thereafter. There is no corpus to split, no annuity-provider quote to shop for and no 60%-versus-80% divergence to manage — but equally, there is no Rs 60,00,000 tax-free lump sum, and the Rs 60,000 annual pension is far smaller than what a Rs 1 crore NPS corpus can generate. The APY suits a saver who prizes certainty over size; the NPS suits one who can tolerate market risk and wants a large lump sum at 60. Model the two income styles against each other with the annuity vs SWP calculator, map your whole post-retirement income with the retirement drawdown calculator, and read what an annuity actually guarantees before you commit.

FAQ

Can my bank actually let me withdraw 80% of my NPS corpus now?

Yes, if you are a non-government (All Citizen or Corporate) subscriber exiting at the normal age. The PFRDA (Exits and Withdrawals under the NPS) (Amendment) Regulations, 2025, notified on 19 December 2025, raised the non-government lump-sum limit to 80%, with a minimum 20% annuity. The 14 January 2025 master circular requires your PoP to apply this correctly for your sector — the government sector and NPS-Lite remain at 60/40.

Is the whole 80% lump sum tax-free, or only the 60% covered by Section 10(12A)?

No. Section 10(12A) of the Income-tax Act, 1961 exempts the NPS closure payment only up to 60% of the corpus, a ceiling unchanged since 1 April 2020. PFRDA's 80% withdrawal limit and the Act's 60% exemption limit are different numbers. Treat 60% as clearly exempt and confirm the treatment of any withdrawal above that line with a tax adviser before filing your exit.

Can I claim the Rs 50,000 NPS deduction under Section 80CCD(1B) in the new regime?

No. The Section 80CCD(1B) deduction of Rs 50,000 for voluntary NPS contributions is available only under the old tax regime. It is not available under the new regime, so a new-regime taxpayer gets no extra deduction for the Rs 50,000 top-up.

Why can't I join the Atal Pension Yojana?

Since the Ministry of Finance notification effective 1 October 2022, any citizen who is or has been an income-tax payer is not eligible to join APY. The scheme remains open to non-taxpaying citizens aged 18 to 40. The NPS has no such income-tax bar.

How is my NPS annuity income taxed each year?

The amount used to buy the annuity is not taxed when you purchase it, but every annuity instalment you receive afterwards is taxable at your slab rate in the year of receipt, treated like a pension. The same applies to the monthly pension paid by APY from age 60.

What happens to my NPS if I exit before 60?

On a premature exit from the non-government NPS, you may take only 20% as a lump sum and must annuitise at least 80%, unless the corpus is Rs 5,00,000 or less, in which case you can take it all in cash. The 2025 amendment removed the earlier five-year minimum lock-in for premature exit.

Does the 25% partial-withdrawal rule have the same tax mismatch?

No. Section 10(12B) exempts up to 25% of the subscriber's own contributions, and PFRDA also caps partial withdrawals at 25% of own contributions — so the tax limit and the regulatory limit match. The divergence only arises on the lump sum at final exit, where 80% can be withdrawn but 60% is exempt.