NPS at 60: the tax cost of taking 80% as a lump sum

What changed, and what did not

From 15 December 2025, PFRDA lets most NPS subscribers take up to 80% of their corpus as a lump sum at a normal exit, up from 60%. At least 20% must still buy an annuity, a pension contract from a life insurer.

Three carve-outs matter:

• Government employees must still annuitise at least 40%, so their lump sum tops out at 60%.
• A corpus of ₹8 lakh or less can be withdrawn in full.
• Between ₹8 lakh and ₹12 lakh, the lump sum is capped at ₹6 lakh, and the rest goes to an annuity or is paid out in instalments over at least six years.

What did not change is the tax. Only 60% of the corpus is tax-free. The slice between 60% and 80% is new money you can take, and it is taxed as ordinary income in the year you take it.

A worked example: ₹50 lakh at 60

Say your Tier I corpus is ₹50 lakh at a normal exit, and you are not a government employee.

The question is what that taxable ₹10 lakh costs. The answer depends almost entirely on your other income in the same financial year.

The tax on the extra ₹10 lakh

New regime, FY 2026-27 rates, with the section 87A rebate, its marginal relief and the 4% cess, computed with the same tax engine as our income tax calculator. "Other income" is everything else taxable that year, after deductions.

What the table says

With no other income, the extra 20% is effectively free. ₹10 lakh on its own sits under the ₹12 lakh limit up to which the new regime's rebate wipes out the tax. Someone whose NPS exit falls in a year with no salary, rent or interest to speak of can take the full 80% and pay nothing on it.

The rebate cliff makes the middle expensive. With ₹12 lakh of other income you owe nothing on that income alone. Add the ₹10 lakh and your total is ₹22 lakh, past the rebate, so tax falls on all of it. The extra ₹10 lakh costs ₹2.60 lakh, 26% of the withdrawal.

The year you retire is usually a high-income year. If you work until your 60th birthday in, say, October, that year's salary counts as other income. A lump sum taken in the same financial year is taxed on top of it.

The other side: the annuity is taxed too

Leaving the ₹10 lakh in the annuity does not make it tax-free. The pension it pays is taxed at your slab rate every year. The difference is timing: the income arrives in small yearly amounts, and if your total income in retirement stays under ₹12 lakh a year, the new regime's rebate means it owes nothing.

So the choice is not tax versus no tax. It is:

• ₹10 lakh now, taxed at whatever your rate is this year, and yours to invest, spend or leave to heirs as you like; or
• a pension for life from that ₹10 lakh, fixed at today's annuity rates, taxed year by year, and leaving nothing to heirs unless you choose a variant that returns the purchase price.

Our guide to what an annuity actually pays works through the rates and variants.

Questions to answer before you choose

1. What else will I earn this financial year? Salary, rent, interest and any other withdrawals all count.
2. Do I need the cash, or do I need the income? A larger annuity suits someone with no other pension. A larger lump sum suits someone with EPF, rental income or a working spouse.
3. Am I a government employee? Then your maximum lump sum is 60%, all of it tax-free, and the question does not arise.

The NPS calculator applies the current exit floors and the tax on the slice above 60%. For the broader comparison, see EPF vs NPS for retirement and our NPS guide.

PFRDA's withdrawal rules and the tax treatment have both changed more than once. Check the current position, and your own tax figures, before you file your exit request. This is not tax advice.