How is NPS taxed at retirement: the 60% lump sum and 40% annuity rule explained
NPS gives great deductions while you contribute — but at 60, you can only withdraw 60% as a tax-free lump sum. The other 40% must buy an annuity, and that monthly pension is taxable. On a ₹1 crore corpus, ₹40 lakh is locked into a taxable pension. Here's the full 60/40 rule and how it compares to EPF.
All figures and facts in this article are sourced directly from primary government and regulatory publications — including the Reserve Bank of India, SEBI, EPFO, the Income Tax Department, PFRDA, and IRDAI — and verified before publication. No claim is published from a single source without corroboration.
For informational purposes only. NPS taxation rules are subject to change. Verify current rules at incometax.gov.in and pfrda.org.in. Consult a CA before making retirement withdrawal decisions.
NPS gives generous tax deductions while you contribute. But the tax treatment at retirement is where many people get surprised: you cannot simply withdraw the whole corpus tax-free. A portion must be converted into an annuity (a monthly pension), and that pension is taxable. Understanding the 60/40 rule before you retire helps you plan around it.
The 60/40 rule at age 60
When you reach 60 and exit NPS Tier 1:
60% of your corpus: lump sum, tax-free
You can withdraw up to 60% of the accumulated corpus as a lump sum. This entire amount is exempt from tax under Section 10(12A).
40% of your corpus: mandatory annuity
At least 40% must be used to purchase an annuity (a pension product) from an IRDAI-registered insurance company. The amount used to buy the annuity is not taxed at the point of purchase — but the monthly pension you subsequently receive is taxable as income at your slab rate in retirement.
Example: Your NPS corpus at 60 is ₹1 crore.
- ₹60 lakh: withdrawn as lump sum, tax-free
- ₹40 lakh: used to buy an annuity
- The annuity pays a monthly pension (at roughly 6% of ₹40 lakh = approximately ₹20,000/month, varying by annuity type) — this pension is added to your taxable income each year
Source: NPS taxation, ClearTax · Section 10(12A), Income Tax Department
The tax treatment summarised
| Component | At withdrawal | Ongoing |
| 60% lump sum | Tax-free (Section 10(12A)) | — |
| 40% annuity purchase | Not taxed at purchase | Monthly pension taxable at slab rate |
The lump sum being tax-free makes NPS relatively efficient. The annuity being taxable — and mandatory — is the main constraint that distinguishes NPS from EPF or mutual funds (where you control the entire corpus at the end).
What an annuity actually is
An annuity is a financial product where you pay a lump sum to an insurer, and they pay you a fixed periodic income for life (or for a chosen term). NPS annuities are bought from IRDAI-registered insurers through the NPS platform.
Annuity options include:
- Life annuity: Pension for your lifetime; stops on death
- Life annuity with return of purchase price: Pension for life; the ₹40 lakh corpus returns to your nominee on death
- Joint life annuity: Pension continues to your spouse after your death
Current annuity rates typically deliver approximately 6–6.5% of the corpus as annual pension. On ₹40 lakh, that is approximately ₹2.4–2.6 lakh per year (₹20,000–₹21,700/month) — fully taxable as income.
Early exit before 60: a stricter rule
If you exit NPS Tier 1 before age 60 (premature exit):
- Only 20% can be withdrawn as lump sum
- 80% must be used to buy an annuity
This is much more restrictive than the 60/40 at age 60. Premature exit is permitted only after a minimum period and locks most of your corpus into an annuity — which is why NPS is genuinely a retirement product, not a flexible savings vehicle.
Exception: If the total corpus is below ₹2.5 lakh at premature exit, the entire amount can be withdrawn as a lump sum without the annuity requirement.
◇ Quick check: is the annuity obligation a dealbreaker for you?
Before committing large sums to NPS, ask: are you comfortable that 40% of your NPS corpus will be locked into a taxable annuity you cannot touch as a lump sum? If you want full control of your entire retirement corpus, EPF/VPF (no annuity requirement, fully withdrawable at retirement) and equity mutual funds (full flexibility) give you that control. NPS trades some of that control for its tax deductions during the accumulation phase.
How NPS compares to EPF at retirement
| NPS Tier 1 | EPF | |
| Withdrawal at retirement | 60% lump sum tax-free, 40% annuity | 100% withdrawable, tax-free (after 5 yrs service) |
| Annuity obligation | Yes (40%) | None |
| Returns | Market-linked (~10-12% equity) | 8.25% guaranteed (FY 2025-26) |
| Tax on retirement income | Annuity pension taxable | No ongoing tax |
NPS offers potentially higher returns (equity exposure) but the annuity constraint. EPF offers guaranteed returns and full control at retirement. Many financial plans use both — EPF as the guaranteed core, NPS for the additional tax deduction and equity exposure.
Bottom line
- At 60, NPS Tier 1 allows 60% lump sum withdrawal (tax-free) and requires 40% to buy an annuity
- The 60% lump sum is exempt under Section 10(12A); the annuity pension is taxable at your slab rate
- Premature exit before 60 is stricter: only 20% lump sum, 80% annuity
- Corpus below ₹2.5 lakh at premature exit can be fully withdrawn
- The mandatory annuity is NPS's main trade-off vs EPF and mutual funds, which give full control of the corpus
Frequently asked questions
Q: Can I withdraw 100% of my NPS at 60 if I don't want an annuity?
A: No — for a corpus above ₹5 lakh, the 40% annuity is mandatory. Only if your total corpus at 60 is ₹5 lakh or below can you withdraw the entire amount as a lump sum without buying an annuity.
Q: Is the annuity pension really taxable?
A: Yes. The monthly annuity/pension you receive is treated as income and taxed at your applicable slab rate in the year of receipt. In retirement, if your total income (including the pension) is below the taxable limit, you may owe little or no tax — but the pension is part of taxable income.
Q: Can I delay buying the annuity past age 60?
A: Yes. You can defer the annuity purchase and the lump sum withdrawal up to age 75. You can also continue contributing to NPS until 75. Deferring lets the corpus continue growing, though the eventual 60/40 split still applies.
Q: What happens to the annuity corpus when I die?
A: It depends on the annuity option chosen. A "return of purchase price" annuity returns the corpus to your nominee on death. A plain life annuity pays a higher monthly pension but the corpus is not returned. Choose the annuity type based on whether you want to leave the corpus to heirs or maximise your own pension.
Sources: NPS taxation, ClearTax · NPS exit rules, PFRDA · Section 10(12A), Income Tax Department
Last verified: June 2026. NPS withdrawal and tax rules are subject to PFRDA and income tax regulation. Verify before acting.
Content on Ek Crore is for educational purposes only. Nothing here is financial advice. Always consult a SEBI-registered advisor, CA, or qualified professional before making investment or tax decisions.