NPS Withdrawal Tax Rules 2026 — 60% Exempt, Annuity Taxable, Partial Withdrawal

The National Pension System (NPS) is one of the most tax-efficient retirement savings instruments in India. But the tax rules on withdrawal are often misunderstood. Here is the complete guide for FY 2025-26.

NPS Withdrawal at Retirement (Age 60)

When you reach 60 and exit NPS:

Example:

• NPS corpus at 60: ₹1 crore
• 60% lump sum: ₹60L — Tax-free
• 40% annuity: ₹40L — Tax-free at purchase
• Monthly annuity: ₹20,000/month — Taxable as salary

Can you withdraw more than 60% as lump sum? No. You must use at least 40% for annuity purchase. You can choose to use more than 40% for annuity (up to 100%), but the minimum is 40%.

NPS Withdrawal Before 60 (Premature Exit)

If you exit NPS before age 60:

Premature exit is significantly less flexible — you can only take 20% as lump sum and must use 80% for annuity.

NPS Partial Withdrawal Rules

You can make partial withdrawals from NPS (Tier I) after 3 years of subscription:

• Maximum: 25% of your own contributions (not employer contributions)
• Frequency: Up to 3 times during the entire subscription period
• Purpose: Specific purposes only — higher education, marriage of children, purchase/construction of house, treatment of critical illness

Tax on partial withdrawal: Fully exempt — no tax on partial withdrawals.

NPS Tier II — No Tax Benefits

NPS Tier II is a voluntary savings account:

• No tax deduction on contributions
• Withdrawals are taxable as capital gains (LTCG or STCG based on holding period)
• Exception: Government employees can claim Section 80C deduction on Tier II contributions (with 3-year lock-in)

Tax Deductions on NPS Contributions

The ₹50,000 Section 80CCD(1B) deduction is the most valuable NPS benefit — it is available in both old and new regimes, making it the only significant deduction available in the new regime.

NPS for Government Employees

Government employees joining after January 1, 2004 are mandatorily enrolled in NPS:

• Employee contribution: 10% of basic + DA
• Employer contribution: 14% of basic + DA (increased from 10% in Budget 2019)
• Both contributions are deductible/exempt

Unified Pension Scheme (UPS): From April 1, 2025, government employees can choose between NPS and the new Unified Pension Scheme (UPS). UPS provides a guaranteed pension of 50% of average basic pay for the last 12 months before retirement (for 25+ years of service).

How to Report NPS Withdrawal in ITR

Lump sum withdrawal (60%): Exempt — report in Schedule EI (Exempt Income)

Annuity income: Report in Schedule S (Salary) — taxable as salary

Partial withdrawal: Exempt — report in Schedule EI

Frequently Asked Questions

Is NPS corpus taxable if I die before retirement?

No. The entire NPS corpus is paid to the nominee tax-free in case of the subscriber's death.

Can I withdraw 100% of NPS corpus as lump sum?

No. You must use at least 40% for annuity purchase. You can withdraw up to 60% as lump sum.

Is the annuity income from NPS taxable?

Yes. Monthly annuity income is taxable as salary income at your applicable slab rate. TDS is deducted by the annuity provider.

Can I choose my annuity provider?

Yes. PFRDA has empanelled several annuity service providers (LIC, SBI Life, HDFC Life, etc.). You can choose the provider and annuity type (life annuity, joint life annuity, etc.) at the time of exit.

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