NPS Withdrawal Tax in India: Tax-Free Lump Sum, Annuity and ITR Reporting

The National Pension System (NPS) has separate rules for when you may withdraw your pension corpus and how much of a withdrawal is tax-free. These rules are related but not identical: a withdrawal allowed by the Pension Fund Regulatory and Development Authority (PFRDA) is not necessarily fully tax-free.

The Income-tax Act, 1961 applies to amounts received up to 31 March 2026. The Income-tax Act, 2025 applies to amounts received from 1 April 2026. Under the earlier law, the main lump-sum exemption is under Section 10(12A). Under the new Act, the exemption is in Schedule II, Table serial number 6. Under both frameworks, the general exemption is limited to 60% of the total amount payable at closure or exit.

Annuity purchases and partial withdrawals have separate rules. The tax result also depends on whether you exit normally, exit prematurely or receive a payment after the subscriber’s death.

What counts as an NPS withdrawal?

An NPS subscriber may receive money from the account in different ways:

• A partial withdrawal during the subscription period, if the applicable conditions are met.
• A lump-sum withdrawal when the account is closed or the subscriber exits.
• Systematic withdrawals, including scheduled lump-sum or unit-redemption options, where permitted under the exit rules.
• An annuity purchased with part of the accumulated pension wealth. The annuity provider then pays pension according to the selected option.
• A payment to a nominee or legal heir after the subscriber’s death.

Check each payment separately. A lump sum may qualify for an exemption up to a limit, while pension received from an annuity is generally taxable in the year it is received.

Tax treatment at normal exit

The exit rules depend on the NPS sector and subscriber category. PFRDA’s exit regulations have changed, so older summaries may show different lump-sum and annuity percentages. Check the current rules for your Central Government, State Government, corporate or All Citizen Model account before requesting an exit.

Under current PFRDA rules, non-government subscribers may generally receive up to 80% of their accumulated pension wealth as a lump sum at normal exit, with at least 20% used to purchase an annuity. Government-sector rules generally allow a maximum 60% lump sum and require at least 40% for an annuity. Special options may apply to smaller account balances, and thresholds can vary by sector and exit circumstances.

These percentages describe what PFRDA permits you to withdraw or use for an annuity. They do not determine the tax exemption. The general tax exemption on the lump-sum portion remains limited to 60% of the total amount payable.

Example: 80% lump-sum option

Suppose your pension corpus is ₹50 lakh and the PFRDA rules for your account permit you to take up to 80% as a lump sum. You take ₹40 lakh and use ₹10 lakh to purchase an annuity.

The general lump-sum exemption is limited to 60% of ₹50 lakh, or ₹30 lakh. The remaining ₹10 lakh of the lump sum may be taxable. The ₹10 lakh used to purchase the annuity is treated separately; pension received from that annuity is generally taxable as it is paid.

This example assumes no special rule changes the result. Verify the treatment for your account and exit date before filing.

What if you can withdraw the entire corpus?

PFRDA may allow a full withdrawal in some cases, including certain exits with a small accumulated balance. The permitted amount depends on the subscriber’s sector, exit type and applicable threshold.

A full withdrawal does not necessarily mean the entire payment is tax-free. If the lump sum is more than 60% of the amount payable, the portion above the general exemption may be taxable unless a specific exemption applies. A small-corpus threshold under PFRDA rules is not necessarily a tax-exemption limit.

PFRDA permits a lump-sum payment to a nominee in specified circumstances following a subscriber’s death. The Income Tax Department’s guidance treats a qualifying death benefit received by the nominee as exempt. If the nominee chooses an annuity or later receives annuity payments, check the tax treatment of those payments separately.

Premature exit

If you leave the plan before normal retirement or the applicable vesting condition, a larger portion of the accumulated wealth may need to be used to purchase an annuity. For many subscribers, the general PFRDA rule allows up to 20% of the corpus as a lump sum, with at least 80% used for an annuity. Small-corpus exceptions and sector-specific rules may change the permitted split.

The tax treatment needs a separate calculation. The lump-sum exemption is generally capped at 60% of the total amount payable, while the amount used to purchase an annuity is treated under its own provision. Periodic annuity income is generally taxable.

Compare the current exit rules with the tax treatment before requesting an early exit. Check with your Central Recordkeeping Agency (CRA) or NPS service provider to confirm the options available for your account.

Partial withdrawal before exit

NPS permits partial withdrawals for specified purposes and subject to conditions. These may include education, marriage, housing or medical needs, depending on the rules that apply to the subscriber.

For tax purposes, an eligible partial withdrawal is generally exempt up to 25% of the subscriber’s own contributions. The limit is based on contributions, not 25% of the account’s current market value. Investment growth in the account does not increase this tax-free limit.

Keep the withdrawal request, approval and contribution history. If you have made more than one partial withdrawal, check the current law and return utility for how the exemption should be calculated and reported.

Annuity income: what is taxable?

The amount set aside to buy an annuity is different from the pension paid by the annuity provider. The purchase amount is generally not taxed merely because it is used to buy the annuity. Once payments begin, the pension income is generally taxable at the rates that apply to you.

Tax is generally calculated on the income received during the year, not on the full amount used to purchase the annuity. Your annuity statement should show the pension paid during the year. Check whether the payer has reported any tax deduction against your PAN and reconcile it with your tax records.

Do not treat the entire annuity purchase price as an exempt lump sum in your return. Record the purchase and later pension payments separately.

The tax regime and NPS contributions

NPS contribution deductions and NPS withdrawal exemptions are different parts of the tax calculation. Depending on your eligibility and tax regime, contributions may qualify under provisions such as Sections 80CCD(1), 80CCD(1B) or 80CCD(2) of the Income-tax Act, 1961. These deductions do not determine whether a later withdrawal or annuity payment is taxable.

The 60% withdrawal exemption is not a contribution deduction. It applies to the amount received at closure or exit. Choosing a particular tax regime for the year does not automatically make an otherwise taxable annuity payment tax-free.

For more on NPS contributions and the overall Section 80C limit, see TaxClear’s Section 80C deduction guide.

How to report an NPS withdrawal in your ITR

Report the income in the return for the year in which you receive it. For example, an amount received during FY 2025-26 is generally reported in AY 2026-27. A receipt from 1 April 2026 falls under the Income-tax Act, 2025 framework for Tax Year 2026-27.

The return should distinguish between:

• The exempt portion of a qualifying lump sum;
• Any taxable portion of a lump-sum exit payment;
• An eligible exempt partial withdrawal; and
• Taxable pension or annuity payments received during the year.

The AY 2026-27 ITR forms include NPS withdrawal exemption fields in Schedule Exempt Income. For receipts from 1 April 2026, use the applicable Tax Year 2026-27 return and the new forms. The form and schedule for taxable annuity income may depend on the type of payment and your other income. Follow the current return utility’s instructions rather than putting every NPS receipt in the same field.

Your ITR form depends on your full income and eligibility, not just on the fact that you have NPS income. A person with salary or pension and limited other income may qualify for a simpler return. Business or professional income, or other conditions, may require a different form. TaxClear’s salaried employee ITR guide and online ITR filing guide explain form selection and filing steps.

Records to keep

Keep documents that show how the amount was calculated and paid:

• NPS account statement and accumulated pension wealth statement at exit;
• Exit request, CRA confirmation and payment advice;
• The amount used to purchase an annuity and the annuity policy or certificate;
• Annuity statements showing pension paid during the year;
• Records of partial withdrawals and your own contributions;
• Tax deduction certificates or tax-credit information, if any; and
• The filed return, computation and acknowledgement.

Reconcile the figures with your bank statement and the information available against your PAN. If the provider’s statement and tax-credit records do not match, ask the provider to correct its reporting before claiming a credit.

Common mistakes to avoid

• Assuming that a PFRDA-permitted 80% lump sum is 80% tax-free.
• Treating the amount used to buy an annuity and the annuity payments as the same receipt.
• Claiming 25% of the current corpus as an exempt partial withdrawal instead of applying the contribution-based limit.
• Failing to compare the exit statement with the amount credited to your bank.
• Omitting an NPS receipt because it appears differently from what you expected in a pre-filled return.
• Using an old return form or exit percentage without checking the rules for your account and receipt date.

Frequently asked questions

Is 80% of an NPS corpus tax-free?

No. Current PFRDA rules may allow certain non-government subscribers to withdraw up to 80% as a lump sum at normal exit. The general income-tax exemption remains limited to 60% of the total amount payable.

Is NPS annuity income taxable?

Generally, yes. Pension received from an annuity is taxable in the year it is paid. The amount used to purchase the annuity is treated separately.

Can a partial NPS withdrawal be made tax-free?

An eligible partial withdrawal is generally exempt up to 25% of the subscriber’s own contributions, subject to the applicable conditions.

Is an NPS payout after the subscriber’s death taxable?

A qualifying lump-sum payment received by a nominee after the subscriber’s death is generally exempt. Check separately if the nominee chooses an annuity or later receives pension payments.

Where do I report the exempt NPS amount in my ITR?

Use the exempt-income fields and instructions in the return form for the relevant year. Report any taxable exit amount or annuity income separately under the appropriate schedule.