It was the last staff meeting of the academic year at GHS Rang. While most teachers were planning their summer break, Mrs. Sonia, the Hindi teacher, leaned over her notebook and whispered,
“Sir, jab national pension scheme (NPS) se paisa nikalte hain na, kitna tax lagta hai?”
Her question made the entire staffroom pause — everyone wanted to know the same thing. The National Pension Scheme withdrawal rules often sound complicated, but they’re actually quite simple once you understand the 60/40 rule.
I smiled, remembering my own experience from October 2024, during the SLDP (School Leadership Development Programme) training at Kullu. One of the sessions there had focused on financial awareness for school leaders — how principals and teachers can plan their retirement more wisely. That’s when I had first learned how crucial it is to understand your NPS withdrawals correctly.
At retirement (age 60), National Pension Scheme withdrawal rules allow you to withdraw 60% of your corpus as a lump sum — and the best part, it’s completely tax-free. The remaining 40% must be used to purchase an annuity (a pension plan), which ensures monthly income for life. In simple words, 60% is cash in hand — tax-free — and 40% buys you a lifetime pension. As ICICI Bank clarifies, “up to 60% of the maturity amount is tax-free,” while “annuity payouts are taxable as per your income tax slab.”
For every teacher planning a secure retirement, understanding the National Pension System (NPS) withdrawal rules can make the difference between confusion and confidence when you finally hang up your chalk for good. Under the NPS (All Citizen Model) governed by PFRDA, withdrawals are permitted in specific ways — at retirement, on early exit, or during emergencies. The following points are based on official PFRDA and NSDL guidelines.”
Normal Retirement (Age 60) – 60/40 Rule under National Pension Scheme Withdrawal Rules
- 60% Lump Sum (Tax-Free): At superannuation (age 60), you can withdraw up to 60% of your total NPS corpus as a one-time lump sum under the National Pension Scheme withdrawal rules. According to PFRDA , this amount is completely tax-exempt under Section 10(12A) of the Income Tax Act.
- 40% Mandatory Annuity: The remaining at least 40% of your corpus must be invested in an approved annuity (pension) plan, as per PFRDA guidelines. The money used to buy the annuity is not taxed at the time of purchase, but the pension you later receive is treated as regular income and taxed according to your slab.
- Small Corpus Exception: If your total NPS corpus is ₹5 lakh or less (for All-Citizen NPS), you may withdraw the entire amount as a lump sum without purchasing an annuity . For government subscribers, the limit is ₹2 lakh.
Option to Defer:
Under the National Pension Scheme withdrawal rules, if you don’t exit at 60, your NPS account can continue up to age 75. You may exit anytime after 60, following the 60/40 rule, but at 75 the account must be closed and all benefits settled.
Premature or Voluntary Exit (Before Age 60)
- Exit After 5 Years: If you choose to leave the National Pension System any time after completing 5 years of participation but before age 60, the National Pension Scheme withdrawal rules require that a larger portion of your corpus be used to buy an annuity. Specifically, 80% of your accumulated balance must be invested in an approved annuity plan, and the remaining 20% can be withdrawn as a lump sum, as per PFRDA guidelines .
- Very Small Corpus Exception:: If your total NPS corpus is ₹2.5 lakh or less, you may withdraw 100% of the amount as a lump sum without purchasing an annuity In such cases, no pension is payable. However, if your corpus exceeds ₹2.5 lakh but you are below the minimum annuity purchase age, you must continue in NPS until you become eligible to buy the annuity.
Partial Withdrawals (Emergencies)
Under the National Pension Scheme withdrawal rules, after completing at least 3 years in NPS, you may make partial withdrawals for specific life needs . Each time, you can withdraw up to 25% of your own contributions (excluding investment returns), and you may do this a maximum of three times during your NPS lifetime .
Allowed Reasons:
Partial withdrawals are permitted only for defined purposes as stated by PFRDA under the National Pension Scheme withdrawal rules. These include:
- Higher education or marriage of a child
- Purchase or construction of a residential house (if you do not already own one)
- Treatment of specified critical illnesses such as cancer, kidney failure, or major organ transplant — for self or dependent family members
- Expenses due to disability or incapacitation
- Skill development, vocational training, or starting a small business/startup
Limits:
As per the National Pension Scheme withdrawal rules, each withdrawal is limited to 25% of your contributions, and there must be a minimum gap of 5 years between two withdrawals (except in medical emergencies) .
Death of Subscriber
As per the National Pension Scheme withdrawal rules, if an NPS subscriber passes away, the entire accumulated pension corpus is paid to the nominee(s) or legal heir(s) . In such cases, there is no requirement to purchase an annuity, and the full amount is released to the nominee or heir.
However, under the same National Pension Scheme withdrawal rules, the nominee or heir may choose to invest all or part of the inherited corpus in an approved annuity (pension) plan, if they wish . Otherwise, they may retain the full amount as a lump sum.
Tier-II (Voluntary Savings) Account
Under the National Pension Scheme withdrawal rules, the NPS Tier-II account functions as a voluntary savings account, unlike the Tier-I pension account. You may withdraw funds at any time — in part or in full — without any lock-in or conditions, as per PFRDA guidelines .
Tier-II account holders also have the option to transfer funds back into their Tier-I pension account whenever they wish . This flexibility makes Tier-II ideal for short-term savings alongside your long-term NPS retirement plan.
Tax Treatment under Current National Pension Scheme Withdrawal Rules
Under the National Pension Scheme withdrawal rules, up to 60% of your NPS corpus withdrawn at the time of exit or retirement is completely tax-exempt under Section 10(12A) of the Income Tax Act, subject to applicable conditions. This means the lump-sum portion received at exit does not attract any income tax under current laws.
The remaining 40% of your corpus, which is invested in an approved annuity plan, generates a regular pension. These annuity payments are taxable as part of your annual income and are taxed as per your income-tax slab rate.
Note that Tax laws and exemption limits under the National Pension Scheme withdrawal rules may change over time. Always verify the latest PFRDA and Income Tax Department updates and consult a qualified tax advisor before making withdrawals.
This content is written for educational and informational purposes only. It is not financial advice. Please consult a qualified financial advisor before making investment decisions.
