National Pension System (NPS) subscribers approaching retirement may now have greater flexibility in withdrawing money from their Tier-I account, but withdrawing the entire corpus can raise an important tax question.

Under the revised exit rules cited in the source, a subscriber reaching the normal exit stage with an NPS corpus of up to ₹8 lakh can withdraw the entire amount as a lump sum without being required to purchase an annuity.

However, permission to withdraw 100% of the corpus and exemption from income tax are two separate issues.

Tax and personal finance expert CA Balwant Jain points out that while the pension regulator's exit framework permits higher lump-sum withdrawals in certain cases, the income-tax exemption referred to under Section 10(12A) is limited to 60% of the corpus. This difference could have tax implications for subscribers who choose a complete withdrawal.

Here is how the rules and the tax issue described in the source work.

NPS Exit Rules: How Much Can You Withdraw?

The Pension Fund Regulatory and Development Authority (PFRDA) revised the relevant NPS Tier-I exit and lump-sum withdrawal limits in June 2025, according to the source.

The applicable structure described in the report is:

The previous threshold for complete lump-sum withdrawal was ₹5 lakh, according to the report.

The revised rules therefore provide greater withdrawal flexibility to subscribers with relatively smaller retirement balances.

Corpus Up to ₹8 Lakh: 100% Withdrawal Permitted

The biggest change applies to subscribers whose accumulated NPS corpus is ₹8 lakh or less at the applicable exit stage.

Under the revised PFRDA framework described in the source, such subscribers can withdraw their entire corpus in a lump sum. They are not required to use a portion of the money to purchase an annuity.

For someone who needs immediate access to retirement savings, this can provide significantly more flexibility.

But there is an important distinction: the ability to withdraw an amount does not automatically determine whether the entire withdrawal is exempt from income tax.

Corpus Between ₹8 Lakh and ₹12 Lakh

A different arrangement applies when the accumulated NPS corpus is above ₹8 lakh but does not exceed ₹12 lakh.

According to the rules cited in the source, the subscriber must use at least ₹6 lakh to purchase an annuity. The balance can then be withdrawn as a lump sum.

An annuity converts the invested amount into a stream of pension income according to the terms of the annuity product selected.

Subscribers should therefore consider not only the immediate lump-sum amount but also the income that may subsequently be generated from the annuity.

What Happens When the Corpus Exceeds ₹12 Lakh?

The withdrawal structure changes again when the NPS corpus is more than ₹12 lakh.

According to the source, at least 20% of the corpus must be used for purchasing an annuity, while up to 80% can be taken as a lump sum.

This is different from the earlier framework cited in the article, under which a 40% annuity requirement applied when the corpus crossed the previous threshold.

The revised framework therefore potentially allows subscribers to access a larger portion of their accumulated NPS savings at exit.

The Tax Question: Is a 100% NPS Withdrawal Completely Tax-Free?

This is where subscribers need to distinguish between NPS exit regulations and income-tax provisions.

CA Balwant Jain explains that Section 10(12A) of the Income-tax Act, 1961 provides an exemption for a lump-sum NPS withdrawal up to 60% of the total corpus under the applicable conditions.

The source notes that although PFRDA has increased the amount that can be withdrawn as a lump sum, corresponding tax provisions may not automatically provide an exemption for the entire enhanced withdrawal.

Therefore, according to Jain's interpretation cited in the source, a subscriber who withdraws 100% of a corpus of ₹8 lakh or less could potentially face tax implications on the portion exceeding the 60% exemption.

The precise tax treatment should be checked against the income-tax provisions applicable at the time of withdrawal.

Example: What Happens With an ₹8 Lakh NPS Corpus?

Consider an illustrative case where a subscriber has accumulated exactly ₹8 lakh.

Under the PFRDA exit framework described above, the subscriber could withdraw the entire ₹8 lakh without being compelled to purchase an annuity.

If the tax exemption is restricted to 60% as described by the expert, the calculation would look like this:

Total NPS corpus: ₹8,00,000

60% portion: ₹4,80,000

Remaining 40%: ₹3,20,000

According to the expert interpretation presented in the source, the ₹4.80 lakh portion could fall within the 60% exemption, while the treatment of the remaining ₹3.20 lakh would need to be considered under the applicable tax provisions.

The actual tax liability, if any, would depend on the law applicable to the subscriber and their individual tax circumstances.

Withdrawal Permission and Tax Exemption Are Different

This distinction is particularly important because retirement savers may see the phrase "100% withdrawal allowed" and interpret it as "100% tax-free withdrawal."

The two statements do not necessarily mean the same thing.

PFRDA regulates the NPS framework and determines conditions for exits, withdrawals and annuity requirements.

Income-tax treatment, however, is governed by tax legislation.

A change to the withdrawal rules does not by itself guarantee that the tax exemption will expand by the same percentage.

Subscribers should therefore verify both sets of rules before deciding how much money to withdraw.

Could Buying an Annuity Affect the Immediate Tax Position?

The source highlights another approach for subscribers who do not want to withdraw the entire corpus immediately.

Instead of taking 100% as a lump sum, a subscriber may consider withdrawing only the portion eligible for the applicable lump-sum exemption and using another portion to purchase an annuity or deferring withdrawal where the rules permit.

According to the tax treatment discussed in the source, the amount used for purchasing the qualifying annuity is not taxed at that stage.

However, pension payments subsequently received from the annuity are generally taxable according to the recipient's applicable income-tax provisions.

This means annuity purchase should not be interpreted as permanently eliminating tax. It can change the timing and manner in which income is received and potentially taxed.

Should You Withdraw the Entire NPS Corpus at 60?

The answer depends on more than whether the regulations allow it.

Subscribers should consider their immediate cash requirements, other retirement income, tax position and need for a predictable pension.

Someone with sufficient pension income from other sources may have different priorities from a retiree who depends heavily on NPS for monthly expenses.

Likewise, a complete withdrawal may provide greater liquidity, but it also transfers responsibility for managing and investing the entire retirement corpus to the individual.

An annuity provides a different trade-off by converting part of the accumulated savings into regular income.

Check Tax Rules Before Choosing the 100% Option

The revised NPS exit framework can provide greater flexibility, particularly for subscribers with a corpus of ₹8 lakh or less.

But subscribers should avoid assuming that a regulatory provision allowing 100% withdrawal automatically makes the entire amount tax-exempt.

Before submitting an exit request, it is important to separately check the permitted withdrawal percentage, compulsory annuity requirement and income-tax treatment applicable to the transaction.

For someone with an ₹8 lakh corpus, the difference between a 60% tax-exempt withdrawal and a 100% permitted withdrawal could involve ₹3.20 lakh of the corpus, making the tax interpretation financially significant.

Getting the tax treatment confirmed before choosing the withdrawal option can therefore be just as important as understanding the PFRDA exit rules themselves.

Disclaimer: This article is for general informational purposes only. NPS regulations and income-tax provisions can change, and tax treatment depends on applicable law and individual circumstances. The tax interpretation discussed above reflects the expert view cited in the source. Subscribers should verify the latest PFRDA and Income Tax rules and consult a qualified tax or financial professional before making an NPS withdrawal decision.

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