New NPS withdrawal rules: 80% lumpsum withdrawal allowed but only 60% tax-free, how is the rest taxed?

Your retirement planning just got a serious upgrade. The National Pension System (NPS) is no longer a rigid, lock-in-heavy retirement scheme with limited liquidity. In a major overhaul, the Pension Fund Regulatory and Development Authority (PFRDA) has recently made the NPS more flexible, especially for private sector NPS subscribers. As one of India’s most cost-efficient, market-linked retirement options, these updates couldn’t have come at a better time. In this article, we’ll break down exactly what’s changed in the NPS, how the new NPS withdrawal and annuity rules work, and the important tax implications.

NPS: 80% withdrawal allowed, only 20% for annuity

If the NPS corpus exceeds ₹12 lakh, subscribers can now withdraw 80% of the total corpus as a lump sum. The remaining 20% must be used to purchase an annuity. Earlier, only 60% could be withdrawn as a lump sum, with the balance 40% mandatorily going towards annuity purchase.

This change gives retirees far greater liquidity and control over their retirement savings, as well as greater flexibility in managing post-retirement cash flows.

For those with a smaller retirement corpus, the withdrawal options are even more favourable now. If the total NPS corpus is up to ₹8 lakh, the entire amount can be withdrawn in one go. For the NPS corpus ranging between ₹8 lakh and ₹12 lakh, subscribers can take out up to ₹6 lakh as a lump sum and opt for Systematic Unit Redemption (SUR) for the remaining balance over a minimum span of six years. It is similar to the Systematic Withdrawal Plan (SWP). Retirees can now choose to take money out gradually through market-based withdrawals instead of deciding between a lump sum and annuities. This gives them steady cash flow, more control over their withdrawals, and avoids the need to put a lot of money into annuities all at once.

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Flexible NPS exit option

Non-government NPS subscribers can now exit after completing 15 years of subscription or upon reaching the age of 60, superannuation, or retirement—whichever comes first. Previously, the standard exit age was only at 60 (or upon superannuation). This new flexibility provides significant relief for private sector NPS subscribers by allowing them to access higher lump-sum options earlier without having to wait until age 60.

Longer stay in NPS: Deferment up to age 85

The maximum age for deferring lump-sum withdrawals and annuity purchases has been extended to 85 years. Previously, the deferment was limited to age 75.  This change allows both government and non-government subscribers to keep their investments growing for a longer period. It is particularly beneficial for those who don’t need immediate access to their funds. They will have the chance to build a larger retirement corpus by staying invested.

NPS partial withdrawal norms changed

Partial withdrawals increased from three to four, allowed once every four years, up to 25% of the subscriber’s own contribution. Now subscribers can take out a loan against their NPS balance.

How the new NPS withdrawal rules affect taxation

The recent changes permitting higher lump-sum withdrawals from the NPS raise an important question about their tax implications. Previously, subscribers could withdraw up to 60% of their NPS corpus tax-free at maturity. However, this limit has now increased to 80% for non-government subscribers. It is essential to clarify how the additional 20% will be taxed.

Explaining this, Mihir Tanna, Associate Director, Direct Tax, S K Patodia & Associates LLP, said: “Section 10(12A) of the Income Tax Act, 1961, provides exemption only up to 60% of the total amount payable under the pension scheme. Thus, the tax benefit does not automatically extend just because PFRDA has amended the NPS rules.”

Prakash Hegde, Chartered Accountant, adds: “Even though 80% withdrawal is now allowed under the revised NPS regulations, the portion exceeding 60% will remain taxable under current income tax provisions—until the Income Tax Act is suitably amended.”

So, until tax laws change, here’s how NPS withdrawals will be taxed:

1. 60% of the corpus: Completely tax-free at withdrawal.
2. The additional 20%: Taxable as per your applicable income tax slab rate.
3. The remaining 20% (mandatory annuity): No tax at the time of purchase, but the pension income received later will be taxable in the year of receipt, as per your slab.

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However, your retirment planning should be not be solely based on tax benefits.

Parag Jain, Tax Head at 1 Finance, believes, “The new NPS exit rules have improved liquidity and choice, but taxation remains unchanged until the Income-tax Act, 1961, is also amended. NPS subscribers should view the amendments as a planning opportunity, not a tax giveaway. Effective withdrawal and retirement planning will depend not on how much can be withdrawn, but on how withdrawals are timed and taxed within the existing legal framework.”