NPS Exit Rules 2026: PFRDA Now Allows 80% Lump Sum — But the Taxman Still Only Exempts 60%

By Nitish Bharadwaj · Published Aug 24, 2026 · 7 min

PFRDA's Exits and Withdrawals (Amendment) Regulations, 2025, notified in December 2025, let non-government NPS subscribers take up to 80% of their corpus as a lump sum at exit, cutting the mandatory annuity purchase to 20% (from 40%) once they've completed 15 years in NPS, turned 60, or superannuated — with full lump sum allowed below ₹8 lakh corpus. Section 10(12A) still exempts only 60% of the corpus from tax, so the additional 20% is taxable at your slab rate. Government employees remain on the older 60/40 structure.

For over a decade, NPS ran on one fixed rule at exit: 60% of the corpus as a tax-free lump sum, the remaining 40% locked into a mandatory annuity. In December 2025, PFRDA rewrote that rule for most subscribers — raising the lump sum ceiling to 80% and cutting the mandatory annuity to 20%. The regulator moved first. The Income Tax Act hasn't caught up, and that gap is where a subscriber taking the new, larger lump sum can end up with a tax bill the reform's own headlines don't mention.

The New Exit Rule: 80% Lump Sum, 20% Annuity

PFRDA notified the Pension Fund Regulatory and Development Authority (Exits and Withdrawals under the National Pension System) (Amendment) Regulations, 2025 in December 2025. Under the new structure, a non-government NPS subscriber can withdraw up to 80% of their accumulated pension wealth as a lump sum at exit, with a minimum of only 20% required to go toward purchasing an annuity — down from the earlier 40% mandatory annuitisation. The 20% minimum annuity requirement applies once a subscriber has met at least one of three conditions: completed 15 years under NPS, reached age 60, or superannuated from service.

Government Employees Are Still on the Old 60/40 Rule

The 80/20 structure applies to non-government and All Citizen Model subscribers. Government employee subscribers continue under the earlier framework — 60% lump sum, 40% mandatory annuity at exit — though they separately gained the option to remain invested in NPS up to age 85 rather than being forced to annuitise immediately at retirement. Anyone unsure which model applies to their account should check with their nodal office or Point of Presence before assuming the higher 80% limit applies to them.

The Tax Mismatch: PFRDA Says 80%, Section 10(12A) Still Says 60%

This is the part the reform's press coverage mostly glosses over. Section 10(12A) of the Income Tax Act exempts only 60% of the NPS corpus from tax at withdrawal — a limit that hasn't been amended to match PFRDA's new 80% lump sum allowance. In practice, that means the first 60% of your corpus withdrawn as a lump sum remains fully tax-free, but the additional 20% now permitted by PFRDA (the portion between 60% and 80%) is taxable at your applicable income tax slab rate for the year you withdraw it, since no separate exemption currently covers that slice. The remaining 20% used to buy an annuity isn't taxed at purchase, but the pension income it generates is taxed annually at your slab rate, exactly as it always was.

Annuity Options at Exit

The portion used to buy an annuity goes to a PFRDA-empanelled Annuity Service Provider — insurers such as LIC, SBI Life, HDFC Life, and ICICI Prudential Life currently operate in this space. Common annuity types include a life annuity paying a fixed monthly pension for life with no return of the purchase price, an annuity with return of purchase price to the nominee on death, and a joint life annuity that continues paying a spouse after the primary annuitant's death, usually at a somewhat lower monthly payout than a single-life option. The choice is largely irreversible once made, so it's worth comparing quotes across more than one Annuity Service Provider rather than defaulting to whichever one your Point of Presence suggests first.

The lump sum portion doesn't have to be withdrawn as a single payout either — subscribers can use Systematic Lump Sum Withdrawal (SLW) to stagger it over time instead of taking it all at once, which is one way to manage the tax-slab impact of the newly-permitted extra 20% by spreading it across financial years rather than adding it to a single year's income. For the accumulation phase itself, our NPS Auto Choice vs Active Choice guide covers how your equity allocation glide path is set well before you ever reach this exit decision, and our Section 80CCD(1B) guide covers the deduction that applies while you're still contributing.

If you're weighing NPS against other retirement vehicles altogether, our NPS vs PPF comparison and retirement planning guide cover how the exit-stage mechanics here fit into a broader retirement corpus built alongside PPF, EPF, or mutual fund SIPs.