NPS after the 2025 exit-rule changes: how it works, what it costs and how it is taxed

By Abhishek Sambangi · Updated 19 September 2026 · 9 min read

Short answer. The National Pension System is a low-cost, market-linked retirement account regulated by PFRDA, with money locked in until a defined exit. Since 19 December 2025, a non-government subscriber making a normal exit may take up to 80% of the corpus as a lump sum and must buy an annuity with at least 20% (earlier 60% and 40%); a corpus of ₹8 lakh or less can be withdrawn in full. Government subscribers stay at 60% and 40%. Income-tax law still exempts only 60% of the corpus. In the new tax regime, only your employer's contribution is deductible.

See where NPS fits in your retirement number

What is NPS, and how does it work?

NPS is a defined-contribution pension account. You, your employer or both contribute; pension fund managers invest the money in the mix you choose; and the value at exit depends on contributions and market returns. Nothing is assured. Each subscriber gets a 12-digit Permanent Retirement Account Number (PRAN) that moves with them across jobs and cities. Any Indian citizen aged 18 to 85, resident or not, can join.

Feature	Tier I	Tier II
Purpose	The pension account	Optional savings account; needs an active Tier I
Minimum contribution	₹500 to open, ₹1,000 a year	₹250 to open, no yearly minimum
Withdrawals	Only under the exit and partial-withdrawal rules	Any time
Tax benefit on contributions	Yes, see below	None (a separate tax-saver Tier II exists for central government employees)
Maximum equity under Active Choice	75%	100%

There are four asset classes: equity (E), corporate debt (C), government securities (G) and alternative assets (A, capped at 5% and Tier I only). Under Active Choice you set the split yourself within those caps. Under Auto Choice a life-cycle fund — aggressive, high (LC75), moderate (LC50) or low (LC25) — reduces equity as you age. Since 1 October 2025, PFRDA's Multiple Scheme Framework also lets pension funds offer non-government subscribers additional schemes, whose high-risk variants may hold up to 100% equity, with total charges capped at 0.30% of assets a year.

What changed in the NPS exit rules in December 2025?

PFRDA notified amendments to its Exits and Withdrawals Regulations on 19 December 2025. They mainly loosen the rules for non-government subscribers — the All Citizen and Corporate models — and raise the small-corpus limits for everyone.

Rule (non-government subscribers)	Earlier	Now
Normal exit: lump sum and annuity	Up to 60% lump sum; at least 40% annuity	Up to 80% lump sum; at least 20% annuity
Full withdrawal at normal exit	Corpus of ₹5 lakh or less	Corpus of ₹8 lakh or less. Between ₹8 lakh and ₹12 lakh: up to ₹6 lakh as lump sum, the balance as systematic unit redemption over at least 6 years or an annuity (or the 80/20 route)
When a normal exit is allowed (All Citizen)	At 60	After 15 years of subscription or at 60, whichever is earlier
Lock-in before a premature exit (All Citizen)	5 years	Removed
Premature exit	Up to 20% lump sum; at least 80% annuity; full withdrawal up to ₹2.5 lakh	Same split; full withdrawal up to ₹5 lakh
Maximum age to stay invested	75	85
Partial withdrawals before 60	3 in all	4, at least 4 years apart
Borrowing against NPS	Any pledge of NPS benefits was void	A regulated lender may mark a lien on up to 25% of your own contributions
On death	100% lump sum to nominee; annuity optional	Unchanged, with systematic withdrawal also allowed

Corporate-model subscribers exit on retirement or superannuation as before. Government-sector subscribers keep the 60% lump sum and 40% annuity split, with the same new ₹8 lakh and ₹12 lakh thresholds. Central government employees also have the separate Unified Pension Scheme, which this article does not cover.

How is the NPS corpus split at 60? Three worked examples

The split depends on the size of the corpus on the day you apply to exit. For a non-government subscriber:

Corpus at exit	What the rules allow
₹7 lakh	All of it as a lump sum, or as phased payouts.
₹10 lakh	Up to ₹6 lakh as a lump sum; the other ₹4 lakh through systematic unit redemption over at least 6 years, or an annuity. The 80/20 route is also open.
₹1 crore	At least ₹20 lakh into an annuity. Up to ₹80 lakh as a lump sum or phased payouts.

What is an annuity in NPS? It is a contract with a life insurer empanelled by PFRDA: you hand over a sum and receive a pension for life, on terms fixed at purchase. If the annuity rate on the day were 6% a year — an assumption for illustration, not a quote — ₹20 lakh would buy ₹1,20,000 a year, or ₹10,000 a month. At 5% it is ₹8,333 a month; at 7%, ₹11,667. Options that return the purchase price to your family, or continue the pension to your spouse, pay less. Systematic lump-sum withdrawal (SLW) and systematic unit redemption (SUR) are ways of taking the non-annuity part in instalments while the rest stays invested.

Can I withdraw from NPS before 60?

Yes, in two limited ways: a partial withdrawal while staying invested, or a premature exit that closes the account.

Partial withdrawal. Allowed after 3 years in NPS, up to 25% of your own contributions each time (not the employer's, not the growth), up to 4 times before 60 with a 4-year gap. Permitted purposes: children's higher education or marriage, a first house (once), medical treatment or hospitalisation for you, your spouse, children or parents, disability, and settling a loan taken against the NPS lien. With ₹6 lakh of own contributions, the ceiling is ₹1,50,000.
Premature exit. At most 20% as a lump sum; at least 80% must buy an annuity. A corpus of ₹5 lakh or less can be taken in full.
Tier II has no such limits.

NPS tax benefit: old vs new tax regime

In the new regime the only NPS deduction is for your employer's contribution. The deductions for your own contributions exist only in the old regime. The Income-tax Act, 2025 moved these provisions to Sections 123 and 124 from 1 April 2026; the limits are unchanged.

Contribution	Old regime	New regime
Your own, up to 10% of basic pay plus DA (20% of gross income if self-employed) — formerly section 80CCD(1)	Deductible within the overall ₹1.5 lakh limit	Not deductible
Your own, additional — formerly section 80CCD(1B)	Up to ₹50,000, over and above ₹1.5 lakh	Not deductible
Your employer's — formerly section 80CCD(2)	Up to 10% of basic pay plus DA (14% for central and state government employees)	Up to 14% of basic pay plus DA

Arithmetic, not advice: on basic pay of ₹10 lakh a year, a 14% employer contribution is ₹1,40,000; at a marginal rate of 31.2% (30% slab plus 4% cess) the deduction is worth ₹43,680 a year. The extra ₹50,000 deduction in the old regime is worth ₹15,600 at the same rate. Employer contributions to provident fund, NPS and superannuation above ₹7.5 lakh a year in total are taxed as a perquisite [VERIFY: limit and section under the 2025 Act]. Compare regimes with your own numbers in the tax regime calculator.

At exit. Up to 60% of the corpus taken as a lump sum is tax-free (formerly section 10(12A)). Money used to buy the annuity is not taxed at that point, but the pension it pays is taxed at your slab rate every year. Partial withdrawals are tax-free up to 25% of own contributions. Tier II gains are taxed at your marginal rate, according to NPS Trust.

The 80% problem. PFRDA now lets you take 80%, but the tax exemption has not been raised to match. On a ₹1 crore corpus, ₹60 lakh is tax-free; if you also take the next ₹20 lakh as a lump sum, sources dated May 2026 say it is added to your income. If that were your only income that year, new-regime tax on it would be ₹2,08,000. [VERIFY: re-check for any amendment or CBDT clarification after May 2026, and for the tax treatment of phased SLW/SUR payouts of this slice.]

What does NPS cost?

Very little compared with most market-linked products, which matters over 30 years. As listed by NPS Trust on 19 September 2026, for non-government subscribers:

Investment management fee: 0.04% to 0.12% of assets a year, on a slab that falls as the pension fund's assets grow.
Record-keeping agency: ₹57.63 to ₹69 a year for account maintenance and ₹3.36 to ₹3.75 per transaction, depending on the agency.
Point of presence: up to 0.20% of each eNPS contribution (maximum ₹10,000), and up to 0.125% of the corpus (maximum ₹500) for processing an exit.
NPS Trust: 0.003% a year. GST is extra. Schemes under the Multiple Scheme Framework may charge up to 0.30% a year in all.

Is NPS worth it? Questions that decide it for you

There is no general answer, and we do not give one. NPS trades flexibility for low cost, a forced pension and, for some, a tax deduction. These questions show which side of that trade you are on.

Which tax regime am I in? In the new regime, is my employer willing to route part of my pay as an NPS contribution?
Can I leave this money untouched until 60, or for 15 years, apart from four small partial withdrawals?
Am I comfortable that at least 20% must become an annuity, and that annuity income is taxed at my slab rate?
Is a 75% equity ceiling in Tier I (or a newer 100% equity scheme) consistent with how I want retirement money invested?
What do I already hold for retirement — EPF, PPF, other investments — and what would NPS add?
If I want Tier II only for flexibility, how does its tax treatment compare with the alternatives I would otherwise use?

NPS vs PPF vs EPF at a glance

	NPS Tier I	PPF	EPF
Return	Market-linked, not assured	Set by government each quarter; 7.1% for July–September 2026	Declared yearly; 8.25% for FY 2025-26
Access	Exit at 60 or after 15 years; limited partial withdrawals	15 years; partial withdrawals from the 7th financial year	Retirement; partial withdrawals after 12 months' membership
At exit	At least 20% into an annuity; 60% of corpus tax-free	Tax-free	Tax-free after 5 years of continuous service

The details are in our guide to EPF, VPF and PPF.

FAQ

Is NPS worth it?

It depends on what you give up and what you get. You give up access until 60 or 15 years, and at least 20% of the corpus must buy a taxable annuity. You get very low charges and, in the new regime, a deduction only if your employer contributes. Work through the question list above with your own numbers.

Can I withdraw 100% of my NPS corpus?

Only if it is small. At a normal exit, a corpus of ₹8 lakh or less can be withdrawn in full; on a premature exit the limit is ₹5 lakh. Someone who joined after 60 can withdraw in full up to ₹12 lakh. Above these limits, non-government subscribers must use at least 20% for an annuity.

Is the NPS deduction available in the new tax regime?

Only for the employer's contribution, up to 14% of basic pay plus dearness allowance. The deductions for your own contributions — within the ₹1.5 lakh limit and the additional ₹50,000 — are available only in the old regime.

What is the lock-in period of NPS?

For All Citizen subscribers, a normal exit is allowed after 15 years of subscription or at age 60, whichever is earlier; the separate 5-year lock-in before a premature exit was removed in December 2025. Corporate and government subscribers exit on retirement or superannuation. You may stay invested until 85.

What is the difference between NPS Tier 1 and Tier 2?

Tier I is the pension account: tax benefits, restricted withdrawals, and a compulsory annuity at exit. Tier II is an optional, freely withdrawable account that needs an active Tier I, carries no tax benefit for most people, and allows up to 100% in equity.

What happens to NPS money if the subscriber dies?

For non-government subscribers, the nominee or legal heir can take 100% of the corpus as a lump sum. Buying an annuity is optional, and phased withdrawal is now also allowed. Government-sector rules differ and generally require an annuity for the family.

Sources: PIB — key amendments to PFRDA's exit regulations (19 Dec 2025); PFRDA — Exits and Withdrawals (Amendment) Regulations, 2025; NPS Trust pages on normal exit, partial withdrawal, tax benefits, charges, accounts and asset classes and the Multiple Scheme Framework (site last updated 18 Sep 2026); Section 124 text via EZTax; tax on the lump sum above 60%: 1 Finance (25 May 2026); PPF and EPF rates as cited in our EPF, VPF and PPF guide. All checked 19 Sep 2026.

Education only. This article does not recommend NPS, any pension fund, annuity or asset allocation, and is not investment or tax advice for your situation. Spotted an error? Write to us.

Abhishek Sambangi

Co-founder, Financial Education & Technology · About