NPS withdrawal after 60: Can you take the entire corpus? Know the tax implications

This is because, at exit, NPS subscribers have to follow a different set of exit and withdrawal rules from the NPS for the all-citizen model, as governed by the Pension Fund Regulatory and Development Authority (PFRDA). 

However, the tax treatment is another point to consider here because subscribers may have questions: Is the lump-sum withdrawal from NPS completely tax-free? What happens to the annuity amount? Is the pension received from the annuity taxable?

So if you have invested in NPS and are approaching 60, it is important to understand all types of exit and withdrawal rules under NPS and how taxation works for each component. 

What are the NPS withdrawal rules after 60 and before 60 years of age? 

The withdrawal rules depend on the subscriber category and whether the exit is a normal or premature exit.

For Government-sector subscribers, including Central Government employees, normal exit generally happens on retirement/superannuation as per the applicable service rules. At normal exit, up to 60% of the accumulated pension wealth can be taken as a lump sum, while at least 40% is required to be utilised for an annuity for larger corpus levels. 

The revised regulations also provide more flexibility for smaller corpus. For example, where the corpus is up to Rs 8 lakh, 100% withdrawal is permitted; for corpus between Rs 8 lakh and Rs 12 lakh, there are additional lump-sum/systematic withdrawal options.

For Corporate-sector subscribers, normal exit is linked to retirement/superannuation, with the subscriber also having the option to continue under NPS after retirement. Under the current framework, for a normal exit, up to 80% of the corpus can be withdrawn as a lump sum and at least 20% is to be utilised for an annuity. For corpus up to Rs 8 lakh, 100% withdrawal is permitted; for Rs 8–12 lakh, specific lump-sum and systematic withdrawal options are available.

In contrast, a premature exit has a higher annuitisation requirement: up to 20% can be withdrawn as lump sum and at least 80% is required to be utilised for annuity, subject to the applicable rules and corpus thresholds.

Particulars	Before 60 Years of Age	After 60 Years of Age
Eligibility	Available after 3 years from the date of subscription	Joined pension scheme before 60 age: Available immediately after attaining 60 years of age, subject to completion of 3-year subscription in the pension scheme. Joined pension scheme after 60 age: Available after 3 years from date of subscription
Frequency	Up to 4 times	No fixed frequency; allowed till 85 age
Minimum Interval	4 years between two withdrawals	3 years between two withdrawals

Source: PFRDA

Is the lump-sum withdrawal from NPS completely tax-free after 60? 

The 60% lump-sum component of the NPS corpus at final exit is exempt from income tax under Section 10(12A) of the Income-tax Act. The exemption is linked to the amount withdrawn on closure or opting out of NPS and extends up to 60% of the total amount payable at exit.

“Separately, eligible partial withdrawals from NPS are exempt from tax to the extent of 25% of the subscriber’s own contributions, provided the withdrawal is made in accordance with the conditions prescribed under the PFRDA framework. The 25% limit is calculated with reference to the subscriber’s own contributions and not the accumulated corpus,” said Amit Ganatra, Executive Director at Khaitan & Co. 

“Importantly, the tax exemption should not be confused with the regulatory withdrawal limit. PFRDA may permit a subscriber, in certain circumstances and particularly for a smaller corpus, to withdraw more than 60% or even the entire corpus. However, the Income-tax exemption is separately governed by the tax law,” said Vishwajeet Goel, Head of Pensionbazaar.  

Therefore, any amount falling outside the specific exemption under Section 10(12A) should not automatically be assumed to be tax-free.

The tax treatment of NPS withdrawals should therefore be looked at in two layers: what PFRDA permits you to withdraw and what the Income-tax Act exempts from tax.

How is the annuity portion treated for tax purposes? 

The annuity purchase itself is not treated as taxable income at the time of purchase, provided the amount is used for purchasing the annuity in accordance with the NPS framework.

However, the pension/annuity income subsequently received is taxable in the hands of the subscriber as income in the year in which it is received. The Income Tax Department specifically states that pension received from NPS or an annuity is fully taxable.

This distinction is important: the NPS corpus used to purchase the annuity does not become taxable merely because it is annuitised; it is the periodic pension received from the annuity that is taxable.

Defer NPS withdrawal beyond 60? Know the tax rules

A subscriber does not have to exit NPS immediately on attaining 60. Under the recent changes to the NPS exit framework, the age up to which a subscriber can continue in NPS has been increased from 75 to 85 years, providing greater flexibility to defer withdrawal and allow the corpus to remain invested.

“During the continuation period, the subscriber can choose when to withdraw the eligible lump-sum component or purchase an annuity, subject to the applicable NPS rules. The accumulated corpus continues to remain invested during the deferment period. A subscriber continuing in NPS is required to exit on attaining 85 years,” according to Goel. 

From a tax perspective, the tax treatment applicable to the withdrawal or annuity will be determined by the prevailing tax provisions at the time the benefit is actually taken. 

Therefore, deferring the withdrawal does not by itself create a separate tax liability; the applicable treatment will depend on the nature of the benefit and the tax rules in force at that time.

What happens to the NPS corpus if the subscriber dies before completing the exit process after 60?

If the subscriber dies before completing the exit process, the accumulated pension wealth is payable to the nominee(s) or legal heir(s), subject to the applicable NPS regulations. 

PFRDA permits the entire accumulated corpus to be paid as lump sum on death, with the nominee/family also having the option of purchasing an annuity where permitted.

From a tax perspective, this is an important distinction from normal retirement withdrawal. The Income Tax Department states that the amount received by a nominee on the death of the subscriber is fully exempt from tax.

The tax treatment therefore needs to be assessed separately for a normal exit and an exit on death.

The income-tax law specifically provides that where the subscriber dies before completing the exit process and the accumulated NPS corpus is paid to the nominee / legal heir, the entire receipt is not taxable in the nominee’s / legal heir’s hands. 

“The relevant provision was earlier contained in section 80CCD of the Income-tax Act, 1961 and is now contained in section 124(7) of the Income-tax Act, 2025. The legal heir may also choose to buy an annuity with the accumulated corpus. However, in this case, the subsequent annuity payments will be taxable in the hands of the legal heir,” as per Ganatra.

NPS exit planning: Withdraw more or secure annuity income?

The decision should be driven less by the maximum permissible withdrawal and more by the retiree’s income requirement, longevity risk and liquidity needs.

A retiree should first estimate essential recurring expenses such as housing, healthcare, utilities and household spending, and then assess how much predictable income is required to meet those expenses. 

The annuity component can help create a regular income stream, while the lump-sum component provides liquidity for one-time requirements, emergencies and expenses that may rise during retirement.

Healthcare and longevity are particularly important. Retirement can potentially span two or three decades, so the question is not simply how much corpus can be withdrawn on day one, but how much of that corpus needs to continue supporting the individual over the rest of their life.

Subscribers should also consider other sources of retirement income – such as EPF, other pensions, rental income, deposits and investments – before determining the role NPS needs to play in their overall retirement-income strategy.

How should retirees compare the tax-free NPS lump sum with the taxable annuity income they may receive over the rest of their lives?

The comparison should not be reduced to “tax-free lump sum versus taxable pension”.

The two serve different financial purposes. The lump sum provides immediate liquidity and flexibility, while an annuity converts part of the retirement corpus into a stream of predictable income. The relevant comparison is therefore between liquidity today and income security over time.

As per Goel, a retiree should consider:

●      the amount of regular income required after retirement;

●      other guaranteed or recurring income sources;

●      expected healthcare and living expenses;

●      the tax bracket applicable to future annuity income;

●      inflation and the risk that expenses rise faster than income;

●      the subscriber’s desired liquidity and legacy objectives; and

●      the specific annuity option, including whether it provides a spouse benefit or return-of-purchase-price feature.

A tax-free lump sum may appear attractive upfront, but a retirement corpus also has to last through an uncertain period of longevity. Conversely, putting too large a share into an annuity may reduce liquidity. The appropriate balance is therefore a retirement-income decision, not merely a tax decision.

At what corpus level does choosing an annuity become particularly relevant from a retirement-income perspective?

There is no single corpus level at which an annuity becomes universally appropriate. Its relevance depends on how much guaranteed income the retiree already has and how much additional income is required.

From a retirement-planning perspective, the more useful question is: what proportion of the corpus needs to be converted into a predictable income stream to cover essential expenses?

For example, if a retiree already has substantial pension or other recurring income, the need for additional annuity income may be different from that of a retiree whose NPS corpus is the primary source of retirement income. 

As the corpus becomes larger, annuitising even a relatively modest percentage can create a meaningful additional income stream, while retaining the balance as a lump sum or through systematic withdrawals can provide liquidity.

Ultimately, annuity allocation should be evaluated against the retiree’s income gap, longevity, liquidity requirements, inflation exposure and legacy preferences, rather than using a single corpus number as a universal cut-off.

Disclaimer: This article is for informational purposes only and should not be construed as investment, financial, tax, or legal advice. Any illustrations, examples, or return projections used in this article are for explanatory purposes only and do not guarantee actual investment outcomes. The views and opinions expressed by experts quoted in this article are their own and should not be considered investment recommendations. Readers should consult a qualified professional before making any financial decisions. 

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