NPS Exit Rules 2026: Lump Sum, Annuity and Tax

As of October 2026, a non-government NPS subscriber exiting at 60 with a corpus above ₹12 lakh can take up to 80% as a lump sum and must put at least 20% into an annuity. This follows PFRDA's amended exit regulations notified in December 2025, which replaced the earlier 60:40 rule. Smaller corpuses can be withdrawn fully (up to ₹8 lakh) or largely (₹8–12 lakh), and you can defer withdrawals up to age 85. The catch: only 60% of the corpus has been confirmed as tax-free, and the annuity pension is taxable.

NPS exit rules at a glance (non-government subscribers)

These apply to All Citizen and Corporate model subscribers, as reported from the PFRDA (Exits and Withdrawals under NPS) amendment regulations of December 2025. Check the current rules on the PFRDA or CRA website before exiting.

Government sector subscribers have separate rules; at normal exit above ₹12 lakh, they can take up to 60% as a lump sum, with at least 40% going to an annuity.

Other changes worth knowing

• Stay invested to 85: You can defer both the lump sum and the annuity purchase and remain invested until 85.
• Phased withdrawal: The lump sum need not be taken at once; it can be withdrawn in instalments.
• Partial withdrawals before exit: Reports indicate up to four partial withdrawals are now allowed before 60, with a gap of four years between them, for specified purposes and up to 25% of your own contributions.
• No minimum lock-in for premature exit: The earlier five-year minimum for premature exit was reported as removed for non-government subscribers, though the 80% annuity rule makes early exit costly.

How NPS exit is taxed

The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026. The NPS exemption previously in old Section 10(12A) carried over into the new Act's schedules of exempt income.

• Lump sum: Up to 60% of the total corpus withdrawn at exit is tax-free. The amended PFRDA rules let non-government subscribers take up to 80%, but as of the latest reports, Budget 2026 did not extend the tax exemption to the extra 20%. That extra portion may be taxed at your slab rate unless the law is changed. Confirm the position for the year you exit.
• Annuity purchase: No tax when the money is used to buy an annuity.
• Annuity income: Taxed every year at your slab rate, as pension.
• Contributions: Your own contributions get deductions under the old regime (old Section 80CCD(1) and 80CCD(1B), now Section 124). The employer's contribution (old Section 80CCD(2)) is deductible under both regimes, within limits.

In practice, many subscribers may choose to withdraw only 60% as a lump sum and leave the rest invested or annuitised, to avoid tax on the extra 20%.

Annuity options

An annuity is bought from a PFRDA-empanelled insurer (such as LIC, SBI Life, HDFC Life, ICICI Prudential Life and others). The main types:

Annuity rates depend on your age, the type chosen and interest rates at the time of purchase, and they are locked for life once you buy. Rates for the "return of purchase price" variants are lower. Get quotes from several insurers through the CRA (Protean or KFintech) portal before choosing, as rates differ meaningfully.

Worked example: a ₹1 crore corpus at 60

Anil, a private-sector employee, retires at 60 with an NPS corpus of ₹1 crore. He compares two paths. The annuity rate of 7% is an illustrative assumption, not a quote.

Path A: Maximum lump sum (80:20)

• Lump sum: ₹80 lakh
  • Tax-free: 60% of ₹1 crore = ₹60 lakh
  • Possibly taxable: the remaining ₹20 lakh, at slab rate
• Annuity: ₹20 lakh × 7% = ₹1,40,000 a year (about ₹11,667 a month), taxable

Path B: Tax-efficient (60:40)

• Lump sum: ₹60 lakh, fully tax-free
• Annuity: ₹40 lakh × 7% = ₹2,80,000 a year (about ₹23,333 a month), taxable

Path C: 60% lump sum now, defer the rest Anil could take ₹60 lakh tax-free and leave ₹40 lakh invested in NPS, buying the 20% annuity later and withdrawing the rest in phases. This keeps money growing in NPS but means the eventual treatment of the extra 20% still applies.

If the extra ₹20 lakh in Path A were taxed at 30% plus cess, the tax could be about ₹6.24 lakh. That is why many people near the top slab may prefer Path B or C, while someone with low other income may prefer Path A and pay little tax. The right choice depends on your other income, need for liquidity, health and dependants.

Annuity vs lump sum: what to weigh

Arguments for a larger annuity

• Guaranteed income for life, however long you live.
• No investment decisions needed later.

Arguments for a larger lump sum

• Annuity income is fixed (unless you choose an increasing annuity) and loses purchasing power to inflation; at 6% inflation, a fixed pension buys about half as much after 12 years.
• Annuity income is fully taxable, while a lump sum invested in, say, equity or debt funds is taxed only on gains when withdrawn.
• Flexibility for health emergencies or large expenses.

A common approach is to use the lump sum to build a staggered income plan: safe instruments like the Senior Citizen Savings Scheme for near-term needs and some equity for long-term growth, as in the retirement bucket strategy.

Exit process

1. Initiate exit online through your CRA (Protean CRA or KFintech CRA) using your PRAN, or through your Point of Presence (bank or NPS provider).2. Choose the lump sum percentage, and whether to defer any part.
2. Pick the annuity provider and type, or defer the annuity purchase.
3. Submit documents: KYC, bank proof, PRAN, and for premature exit, the reason.
4. Track the request; the lump sum is credited to your bank account and the annuity starts from the insurer.

To estimate what corpus you need and how much income it can support, try the retirement calculator. For how NPS compares with EPF and PPF while you are still saving, see EPF vs PPF vs NPS.

Key takeaways

• Non-government subscribers with over ₹12 lakh at 60 can now take up to 80% as a lump sum, with at least 20% in an annuity (PFRDA amendment, December 2025).
• Up to ₹8 lakh can be withdrawn fully; ₹8–12 lakh allows up to ₹6 lakh lump sum with the balance as annuity or systematic withdrawal.
• Premature exit above ₹5 lakh still requires 80% to go into an annuity.
• Only 60% of the corpus is confirmed tax-free; the extra 20% may be taxable, and annuity income is taxed at slab rate.
• You can stay invested and defer withdrawals up to age 85.
• Compare annuity quotes and types carefully, since the rate is locked for life.