How much NPS withdrawal is tax-free? 60% of your total NPS corpus is tax-free at retirement under Section 10(12A). PFRDA now allows non-government subscribers to withdraw up to 80%, but only 60% is exempt: the extra 20% is taxable at your slab rate. Annuity income from the remaining corpus is taxable every year. If your corpus is Rs 8 lakh or less, 100% withdrawal is tax-free.
NPS offers tax benefits at three stages: when you contribute (deduction under Section 80CCD), while the corpus grows (no annual tax on gains), and when you withdraw. The withdrawal stage is where most subscribers make mistakes, because the rules differ based on whether you are retiring normally, exiting early, making a partial withdrawal, or passing the corpus to a nominee.
The December 2025 PFRDA regulation changes made NPS withdrawal significantly more flexible: non-government subscribers can now take up to 80% as a lump sum instead of the earlier 60%, the minimum annuity dropped from 40% to 20%, and a new Systematic Lump Sum Withdrawal (SLW) option allows you to draw down in installments until age 75. But the Income Tax Act has not caught up: Section 10(12A) still exempts only 60%. This mismatch is the single most important thing every NPS subscriber approaching retirement must understand.
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Normal Exit: Retirement at Age 60 or Superannuation
This is the standard exit route when you reach 60 or your employer's superannuation age.
How Much You Can Withdraw
Tax Rate Chart
NPS Lump Sum vs Annuity Split at Retirement
Non-Government Subscribers (PFRDA Regulations 2025)
Lump sum (tax-free)
Exempt under Section 10(12A) of Income Tax Act
Lump sum (taxable)
Optional extra withdrawal; taxable at slab rate
Annuity (mandatory minimum)
Must purchase from IRDA-approved insurer; pension income taxable yearly
Source: PFRDA (Exits and Withdrawals under NPS) Regulations, 2025 | Section 10(12A), Income Tax Act 1961
Non-government subscribers (All Citizen Model, Corporate Model) can withdraw up to 80% as a lump sum and must use at least 20% to purchase an annuity from an IRDA-approved insurer.
Government subscribers (Central and State Government) follow the older split: up to 60% lump sum, minimum 40% annuity.
Tiered Rules Based on Corpus Size
The withdrawal split depends on how large your corpus is:
| Total NPS Corpus | Lump Sum Allowed | Annuity Required | Tax on Lump Sum |
|---|---|---|---|
| Up to Rs 8 lakh | 100% | None | Fully tax-free |
| Rs 8 lakh to Rs 12 lakh | Up to Rs 6 lakh | Balance via annuity or SUR/SLW | Tax-free (within 60% limit) |
| Above Rs 12 lakh | Up to 80% (non-govt) / 60% (govt) | Minimum 20% (non-govt) / 40% (govt) | 60% tax-free; extra 20% taxable |
If your corpus is Rs 8 lakh or less, you can take everything in one shot with zero annuity purchase and zero tax. This is the cleanest NPS exit.
The 80% vs 60% Tax Mismatch
This is where the confusion lies.
PFRDA allows non-government subscribers to withdraw 80% of the corpus as a lump sum. But Section 10(12A) of the Income Tax Act exempts only 60% of the total corpus from tax. The additional 20% (the gap between 60% and 80%) is taxable at your applicable income tax slab rate in the year you receive it.
Tax Calculation Example
Rajesh retires at 60 with an NPS corpus of Rs 50 lakh. He opts for 80% lump sum (Rs 40 lakh) and 20% annuity (Rs 10 lakh).
| Component | Amount | Tax Treatment |
|---|---|---|
| 60% lump sum (tax-free) | Rs 30,00,000 | Exempt under Section 10(12A) |
| Extra 20% lump sum (taxable) | Rs 10,00,000 | Taxable at slab rate |
| 20% annuity purchase | Rs 10,00,000 | No tax at time of purchase |
| Annuity income (yearly) | Rs 60,000 to Rs 80,000 | Taxable each year at slab rate |
If Rajesh has no other income in the year of withdrawal and files under the new tax regime, the Rs 10 lakh taxable withdrawal falls within the Rs 12 lakh rebate threshold (Section 87A). His tax on the extra 20% would be zero.
If Rajesh has pension income or other sources pushing his total above Rs 12 lakh, the Rs 10 lakh is taxed at applicable slab rates. At the 15% slab (Rs 12 lakh to Rs 16 lakh under new regime), the tax would be approximately Rs 1,56,000 (including cess).
Tax Optimization: Choose the Right Year
The timing of your lump sum withdrawal matters. If you retire mid-year and have salary income for part of the year, you may want to defer the taxable 20% withdrawal to the next financial year when your total income is lower.
Under the new tax regime, income up to Rs 12 lakh (Rs 12.75 lakh with standard deduction) attracts zero tax thanks to the Section 87A rebate. If the taxable 20% of your NPS withdrawal is your only income in a financial year, it could be entirely tax-free.
Annuity Taxation: The Ongoing Tax After Retirement
The annuity you purchase with 20% to 40% of your NPS corpus generates a monthly or quarterly pension. This pension is fully taxable every year.
How Annuity Income Is Taxed
| Subscriber Type | Income Head | TDS |
|---|---|---|
| Government employee | Income from Salary | Deducted by annuity provider |
| Non-government (employer NPS) | Income from Salary | Deducted by annuity provider |
| Non-government (own contribution) | Income from Other Sources | Deducted by annuity provider |
The annuity service provider (LIC, HDFC Life, SBI Life, etc.) deducts TDS before paying you the pension. You claim credit for this TDS when filing your ITR.
Annuity Income Example
Meera purchases an annuity worth Rs 20 lakh at age 60. Assuming a 6% annual return:
- Annual pension: approximately Rs 1,20,000 (Rs 10,000 per month)
- If this is her only income: zero tax under the new regime (well below Rs 12 lakh threshold)
- If she has other income of Rs 8 lakh (rental, interest): total income Rs 9.20 lakh, still within the rebate threshold
For most retirees whose only income is the NPS annuity plus a small pension or interest, the effective tax on annuity income under the new regime will be zero or very low.
NPS vs PPF: The EET vs EEE Difference
NPS follows the EET model (Exempt-Exempt-Taxed): contributions get a deduction, growth is untaxed, but withdrawal (annuity portion) is taxed. PPF follows the EEE model: contributions get a deduction, growth is untaxed, and withdrawal is also untaxed. This makes PPF more tax-efficient at the withdrawal stage, though NPS typically offers higher returns due to equity exposure.
Systematic Lump Sum Withdrawal (SLW)
SLW is a new option introduced by PFRDA in December 2025 for subscribers who prefer periodic withdrawals over a one-time lump sum at retirement.
How SLW Works
Instead of taking the entire lump sum portion at age 60, you can draw it down in installments:
- Frequency: Monthly, quarterly, half-yearly, or annually
- Duration: Until age 75
- Minimum amount per installment: Rs 1,000
- Investment continues: The remaining corpus stays invested in your chosen NPS fund managers and asset allocation, earning market returns
Tax Treatment of SLW
The tax treatment is identical to a one-time lump sum: 60% of the total original corpus is the cumulative tax-free limit under Section 10(12A), regardless of whether you withdraw it at once or spread it across 15 years via SLW.
SLW is particularly useful for subscribers with a large corpus who want to:
- Avoid a large taxable event in a single year (spread the taxable 20% across multiple years)
- Keep the corpus invested for continued growth during retirement
- Match withdrawals to actual spending needs
If Rajesh from the earlier example used SLW to withdraw the taxable Rs 10 lakh over 5 years (Rs 2 lakh per year), each year's taxable amount is small enough to potentially fall within the rebate threshold, reducing or eliminating tax entirely.
Partial Withdrawal: Tax-Free During Active NPS
You can make partial withdrawals from NPS Tier I while your account is still active, without exiting the scheme.
Eligibility
- Minimum 3 years of NPS membership completed
- Maximum 3 partial withdrawals during the entire NPS tenure
- Up to 25% of your own contributions only (excludes employer contributions and investment returns)
Permitted Reasons
PFRDA allows partial withdrawal only for these specific purposes:
- Higher education of children
- Marriage of children
- Purchase or construction of a residential house
- Treatment of specified critical illnesses (self, spouse, children, or dependent parents)
- Expenses for skill development or re-skilling of the subscriber
Tax Treatment
Partial withdrawals are fully exempt from tax under Section 10(12B) of the Income Tax Act. No TDS is deducted. No reporting obligation in ITR beyond the standard NPS account disclosure.
Example
Sunita has contributed Rs 12 lakh to NPS over 8 years. Her total corpus (including employer contributions and investment returns) is Rs 22 lakh. She needs funds for her daughter's higher education.
- Maximum partial withdrawal: 25% of own contributions = Rs 3,00,000
- Tax: Zero (exempt under Section 10(12B))
- Remaining corpus continues to grow
- She can make 2 more partial withdrawals during her NPS tenure
Premature Exit: Leaving NPS Before Age 60
If you need to exit NPS before turning 60, the rules are significantly less favourable than a normal retirement exit.
Withdrawal Split
| Corpus Size | Lump Sum | Annuity |
|---|---|---|
| Up to Rs 5 lakh | 100% (no annuity) | None |
| Above Rs 5 lakh | Up to 20% | Minimum 80% |
For a corpus above Rs 5 lakh, you must use at least 80% to purchase an annuity. Only 20% can be taken as a lump sum. This is a significant restriction compared to the 80% lump sum allowed at normal retirement.
Tax Treatment
The 20% lump sum on premature exit is tax-free under Section 10(12A). The annuity income is taxable at slab rates, same as a normal retirement annuity.
Example
Amit exits NPS at age 45 with a corpus of Rs 15 lakh.
| Component | Amount | Tax |
|---|---|---|
| 20% lump sum | Rs 3,00,000 | Tax-free |
| 80% annuity purchase | Rs 12,00,000 | No tax at purchase; pension taxable yearly |
Amit will receive a monthly pension from the annuity for life. Each pension payment is fully taxable at his slab rate. Since he is exiting early, the annuity amount purchased is much larger relative to his corpus, and the pension income starts much earlier, resulting in more cumulative tax over his lifetime compared to staying in NPS until 60.
When Premature Exit May Make Sense
- Job loss or career break with no alternative income
- Critical medical expenses exceeding the partial withdrawal limit
- Moving abroad permanently with no plan to return
In most other cases, keeping NPS active or transferring to a new employer's scheme is more tax-efficient than a premature exit.
Death of the Subscriber
Non-Government Subscribers
If the subscriber dies at any age (whether before or after 60), the entire NPS corpus (100%) is paid to the nominee as a lump sum. The nominee is not required to purchase any annuity.
This entire amount is tax-free in the hands of the nominee under Section 10(12A).
Government Subscribers
If a central or state government employee dies while in service, the nominee must use at least 80% of the corpus to purchase an annuity. Only 20% can be taken as a lump sum. The annuity income is taxable in the nominee's hands at their slab rate.
If the government employee dies after retirement (and the annuity is already in place), the death benefit depends on the annuity option chosen at retirement (return of purchase price, joint life, etc.).
Nomination Is Critical
If there is no valid nomination on your NPS account, the corpus goes to the legal heir through a claims process that can take months. Ensure your PRAN has an updated nomination. You can update it online through the CRA portal or through your Point of Presence (PoP).
How to Report NPS Withdrawal in Your ITR
Tax-Free Lump Sum (60%)
Report the exempt lump sum under Schedule EI (Exempt Income) in your ITR form. Select the appropriate exemption clause (Section 10(12A)).
Taxable Lump Sum (Extra 20%)
Report the taxable 20% under:
- Income from Salary if the NPS was linked to your employment
- Income from Other Sources if you contributed independently (All Citizen Model)
Annuity Income
Report pension received from the annuity provider under:
- Income from Salary (government employees and employer-linked NPS)
- Income from Other Sources (self-contributed NPS)
Claim TDS credit in Schedule TDS using the TDS certificate from your annuity provider.
Partial Withdrawal
Partial withdrawals are exempt and reported under Schedule EI with the exemption clause for Section 10(12B). No TDS is deducted on partial withdrawals.
Complete Tax Summary
Tax Rate Chart
NPS Withdrawal Tax Treatment Summary
All Exit Scenarios : AY 2026-27
Normal exit: 60% lump sum
Section 10(12A); up to 60% of total corpus
Normal exit: extra 20% lump sum
Non-govt only; PFRDA allows 80% but IT Act exempts only 60%
Normal exit: annuity income
Pension from annuity taxable every year; TDS deducted by insurer
Partial withdrawal (during NPS)
Section 10(12B); up to 25% of own contributions; max 3 times
Premature exit: 20% lump sum
Section 10(12A); for corpus above Rs 5 lakh
Premature exit: annuity income
80% must buy annuity; pension taxable yearly
Death benefit (non-govt nominee)
100% to nominee; no annuity required; Section 10(12A)
Corpus up to Rs 8 lakh (normal exit)
100% lump sum; no annuity required
Corpus up to Rs 5 lakh (premature exit)
100% lump sum; no annuity required
Source: PFRDA Regulations 2025 | Sections 10(12A), 10(12B), Income Tax Act 1961
Common Mistakes to Avoid
-
Assuming 80% lump sum is 80% tax-free. PFRDA allows 80% withdrawal, but the Income Tax Act exempts only 60%. The gap is taxable.
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Not choosing SLW for large corpus. If your corpus exceeds Rs 50 lakh, taking the entire 80% lump sum in one year creates a large tax event. SLW spreads it across years, potentially keeping each year within the rebate threshold.
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Ignoring annuity taxation in retirement planning. Annuity income is taxable every year for your lifetime. Factor this into your post-retirement income projections.
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Premature exit without exhausting partial withdrawal. Before exiting NPS early, check if a partial withdrawal (25% of own contributions, tax-free) can meet your immediate need without triggering the 80% annuity lock-in.
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Not updating nomination. Without a valid nomination, death benefit claims require legal heir certificates, succession orders, and months of processing. Update your PRAN nomination at nsdl.co.in or through your employer.
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Confusing government and non-government rules. Government subscribers get 60/40 split at retirement, non-government subscribers get 80/20. Government death-in-service nominees must buy 80% annuity, non-government nominees get 100% tax-free.
Transition to Income Tax Act 2025
For AY 2026-27 (income earned during FY 2025-26), the old Sections 10(12A) and 10(12B) of the Income Tax Act 1961 still apply. From Tax Year 2026-27 onwards, these exemptions continue under the new Income Tax Act 2025 framework (Section 11 and the associated exempt income schedule). The substantive rules, limits, and tax treatment remain unchanged.
For the complete section mapping between the old and new Act, see our guide.
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