Is NPS Withdrawal Taxable? (2026 Rules)
Short answer: up to 60% of your NPS corpus taken as lump sum at exit is completely tax-free[Sec 10(12A)]; the annuity bought with the rest pays a pension that is taxed at your slab rate. And there is a new trap: PFRDA now allows an 80% lump sum, but the tax exemption has not moved — the extra 20% is taxable.
NPS tax treatment at a glance
| Withdrawal type | Tax treatment | Legal basis |
|---|---|---|
| Lump sum at 60, up to 60% of corpus | Fully exempt | Section 10(12A) |
| Lump sum between 60% and 80% (new PFRDA option) | Taxable at slab | Exceeds the Sec 10(12A) 60% ceiling |
| Annuity purchase (min 20% of corpus) | Not taxed at purchase | Section 80CCD(5)/(6) |
| Monthly pension from the annuity | Taxable at slab | Income from other sources |
| Partial withdrawal (≤25% of own contributions) | Fully exempt | Section 10(12B) |
| Tier 2 withdrawal | Gains taxable | No exit exemption provision |
| Corpus paid to nominee on death | Exempt | Exempt in nominee's hands; annuity income taxable |
The 80% withdrawal trap: PFRDA moved, the Income Tax Act didn't
From December 2025, PFRDA regulations allow non-government subscribers to take up to 80% of the corpus as lump sum at exit, with a minimum of only 20% annuitised[PFRDA]. But Section 10(12A) of the Income Tax Act still exempts only 60% of the amount payable at closure. Until the Act is amended, anything you withdraw beyond 60% is added to your income and taxed at your slab rate.
If you are in the 30% bracket, taking the extra 20% as lump sum instead of an annuity costs you roughly 30% of that slice immediately — run both options before choosing the exit mix.
How NPS exit tax is worked out
Split the corpus into three slices: the lump sum within 60% (exempt under Section 10(12A)), any lump sum beyond 60% (added to salary-year income, taxed at slab), and the annuitised portion (no tax at purchase; pension taxed at slab as received). Partial withdrawals during the accumulation phase are tested separately against the 25%-of-own-contributions limit in Section 10(12B).
Worked example
Corpus at 60: ₹1,00,00,000 (₹1 Cr), subscriber in the 30% slab, opts for the new 80% lump sum.
Tax-free lump sum: 60% = ₹60,00,000 (Sec 10(12A)). Taxable lump sum: 20% = ₹20,00,000 → tax ≈ ₹6,00,000 + cess at the 30% slab. Annuity: 20% = ₹20,00,000 → at a 6.5% annuity rate pays ≈ ₹10,833/month, taxed at slab each year.
Had they taken the classic 60/40 split instead, the entire ₹60L lump sum stays tax-free and the ₹40L annuity pays ≈ ₹21,667/month (taxable) — with zero tax at exit.
Frequently Asked Questions
Is NPS withdrawal taxable at retirement (age 60)?
Up to 60% of your NPS corpus withdrawn as lump sum at exit is fully tax-free under Section 10(12A) of the Income Tax Act. The portion used to buy an annuity is not taxed at purchase, but the monthly pension it pays is taxable at your slab rate as income from other sources.
If I withdraw 80% lump sum under the new PFRDA rule, is it all tax-free?
No. PFRDA's December 2025 amendment lets non-government subscribers withdraw up to 80% as lump sum with only 20% annuitised — but Section 10(12A) still exempts only 60% of the corpus. The extra 20% you take beyond the 60% exemption is taxable at your slab rate unless the Income Tax Act is amended.
Is NPS partial withdrawal taxable?
No, within limits. Partial withdrawals of up to 25% of your own contributions (not the total corpus), for PFRDA-specified purposes like education, marriage, illness, or a first home, are exempt under Section 10(12B).
Is the NPS annuity (pension) taxable?
Yes. The annuity purchased at exit pays a pension that is fully taxable at your applicable slab rate in the year you receive it, as income from other sources. Only the lump-sum component enjoys the Section 10(12A) exemption.
What if I exit NPS before 60 (premature exit)?
On premature exit (after the minimum vesting period), at least 80% of the corpus must be used to buy an annuity; only 20% is available as lump sum, and the Section 10(12A) exemption applies to that lump sum within the 60% ceiling. If the corpus is small enough for full withdrawal under PFRDA rules, tax treatment follows the same exemption sections.
Is NPS Tier 2 withdrawal taxable?
Yes. Tier 2 has no exit tax exemption — gains on Tier 2 withdrawals are taxable. There is no specific provision in the Income Tax Act for Tier 2, and gains are generally taxed at your slab rate. Only government employees claiming the 80C deduction on Tier 2 (with 3-year lock-in) have a defined tax treatment on contributions.
Is NPS withdrawal on death taxable for the nominee?
The amount received by the nominee or legal heir on the subscriber's death is exempt from tax. For government-sector subscribers the corpus may need to be partly annuitised per PFRDA rules, and any annuity income the nominee then receives is taxable at their slab.
Should I report exempt NPS withdrawal in my ITR?
Yes. Report the exempt lump sum under Schedule EI (Exempt Income) in your ITR, and any taxable portion (excess lump sum or annuity income) under the relevant income heads. Reporting exempt income correctly avoids mismatch notices.
Related tools & guides
Sources & References
Legal basis: Sections 10(12A), 10(12B) and 80CCD, Income Tax Act, 1961; PFRDA (Exits and Withdrawals under NPS) Regulations, 2015 — as amended December 2025 (80% lump-sum withdrawal option).
Official sources
- Income Tax Department — Acts, Rules & Notifications
- Pension Fund Regulatory and Development Authority (PFRDA)
- NPS Trust — official portal
Last verified against official sources: July 2026. Figures are researched from the government sources above and checked before publishing. See our Editorial & Verification Policy.
This page is for informational and educational purposes only and reflects the law as verified on the date shown above. Tax treatment depends on your facts; consult a qualified tax professional before making withdrawal decisions. This is not financial or tax advice.