If you are a private-sector subscriber, you can take up to 80% of the corpus as a lump sum in an NPS withdrawal at 60, but only 60% of the corpus is tax-free, so the slice between 60% and 80% is added to your income and taxed at your slab in the year it is paid. Whether that slice is worth taking out depends mostly on when: under FY 2026-27 new-regime slabs it costs 31.2% or more in a year your salary already puts you in the 30% slab, and about a third of that in a year with little other income.

How much of an 80% lump sum is tax-free?

These are the PFRDA rules for non-government subscribers since the December 2025 amendment to the exit regulations. At normal exit, which is retirement in an employer's NPS, or 60 or 15 years of subscription in an account you opened yourself, at least 20% of the corpus must buy an annuity and up to 80% can come out as a lump sum, at once or in instalments.

The tax rule did not move with the amendment. Section 10(12A) of the 1961 Act exempts 60% of the corpus, and as of October 2026 it has not been extended. Nothing has to come out at 60: the lump sum and the annuity purchase can each be deferred up to 85. Small corpora, premature exit and the government sector's 60/40 split are in the NPS guide.

Girish's ₹80 lakh: what the extra ₹16 lakh costs

Girish turns 60 and retires on 31 January 2027 from a ₹36 lakh CTC job. His NPS corpus is ₹80,00,000, and he has a small pension of ₹15,000 a month from an earlier employer.

At 80%, his lump sum is ₹64,00,000: ₹48,00,000 (60% of the corpus) tax-free and ₹16,00,000 taxable. The other ₹16,00,000 buys the annuity. He has three ways to handle the taxable ₹16 lakh.

Take it at once, before 31 March 2027. Ten months' salary, about ₹27.5 lakh, puts his FY 2026-27 taxable income above ₹24 lakh. Every rupee of the ₹16 lakh is taxed at 30% plus 4% cess: ₹4,99,200. His salary TDS does not cover it, but at 60, with no business income, he owes no advance tax: he pays it as self-assessment tax before filing. Someone exiting before 60 would owe it by 15 March, as advance tax for salaried explains.

Leave it invested and take it from April 2027. He buys the annuity at retirement but defers the ₹64,00,000 lump sum to April 2027, into FY 2027-28. That year his ₹1,80,000 pension, less the ₹75,000 standard deduction, plus ₹96,000 from the annuity (an assumed 6% on ₹16,00,000) is ₹2,01,000 of taxable income. Add the ₹16,00,000 and, with today's slabs held, tax on ₹18,01,000 is ₹1,66,608 including cess. Waiting a few months saves him about ₹3.3 lakh.

Put it into the annuity. He takes 60%, ₹48,00,000, all tax-free. No tax now, but the extra ₹16 lakh is locked in for life: the ₹32,00,000 annuity pays ₹1,92,000 a year instead of ₹96,000. That pension is taxed as income each year, but his taxable income, ₹2,97,000 (₹1,80,000 less ₹75,000, plus ₹1,92,000), is under the ₹4 lakh on which no tax is due.

What is the NPS lump sum tax on the slice above 60%?

Extra tax, cess included, on ₹16 lakh above 60% of an ₹80 lakh corpus, by your other taxable income that year, FY 2026-27 new regime:

Other taxable income that year Extra tax on ₹16 lakh Share of the ₹16 lakh
₹2 lakh (pension and annuity) ₹1,66,400 10.4%
₹12 lakh ₹4,36,800 27.3%
₹20 lakh ₹4,78,400 29.9%
₹24 lakh to ₹34 lakh ₹4,99,200 31.2%
₹40 lakh ₹6,30,240 39.4%

The ₹12 lakh row costs more than its slab suggests, because the extra money also ends the rebate under section 87A of the 1961 Act on income that was tax-free. Above ₹34 lakh of other income, the ₹16 lakh takes total income past ₹50 lakh, where a 10% surcharge applies. Instalments could keep each year's income lower, but section 10(12A) ties the 60% to the amount payable when the account is closed, so check how instalments will be taxed before relying on that.

Annuity or your own drawdown: what does ₹16 lakh buy?

At the same assumed 6%, not a quote (annuity rates vary by age, option and provider), ₹16 lakh in an NPS annuity pays ₹96,000 a year for life. On a plain life annuity it takes about 16.7 years, until Girish is nearly 77, for the pension to return the ₹16 lakh, and nothing goes to his heirs.

Taken in April 2027 instead, the ₹16 lakh leaves about ₹14.3 lakh after tax. Earning the same assumed 6% and drawing ₹96,000 at the start of each year from 60, it still holds about ₹5.7 lakh at 85, and what is left passes to his heirs. The annuity's case: its payment ignores markets and lasts if he lives to 95. How a drawdown is taxed depends on where the money sits, as SWP tax on ₹60,000 a month works out, and making savings last from 60 to 85 shows how a pension and a drawdown fit together.

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Frequently asked questions

Yes. The annuity is added to your income each year and taxed at your slab, with no separate exemption. Under the FY 2026-27 new regime, if your total taxable income stays at ₹12 lakh or less, the rebate under section 87A of the 1961 Act makes the tax nil.
Only if it counts as normal exit: retirement under your employer's terms in a corporate account, or 15 years of subscription in an account you opened yourself. Otherwise it is a premature exit, with up to 20% as a lump sum and at least 80% into an annuity unless the corpus is ₹5 lakh or less. You can instead leave the account invested until 60.
Up to 85. While deferred, the money stays invested and is taxed only when paid out, so choosing the year it arrives is how you control the slab on the part above 60%. If you die before taking a deferred amount, it goes to your nominee or legal heirs.

This is general information for salaried individuals in India, not personalised financial advice.