All You Need to Know About NPS Withdrawals

Tier 1 Account: The Primary Pension Account

Tier 1 is the core of NPS. It comes with tax benefits, but there are clear limits on when and how much you can take out. There are three situations where money can leave a Tier 1 account: a partial withdrawal while you are still accumulating, an early exit before age 60, and a normal exit when you retire.

Partial Withdrawal from Tier 1

Partially withdrawing money from Tier 1 is possible, but it is subject to stringent criteria. For partial withdrawal from the scheme, an individual must have enrolled in NPS for at least three years. Additionally, the sum withdrawn will have to be less than 25% of the amount that has been contributed by the investor in total.

The individual can make up to four withdrawals before age 60, with a gap of at least five years between each withdrawal. After age 60, partial withdrawals are permitted without any cap on the number of withdrawals, provided there is a gap of at least three years between each one. In case of a medical emergency, the five-year gap condition does not apply. This withdrawal should be made on some legitimate grounds, such as providing financial aid to the children for higher studies or marriage, building a house, or treating a critical illness.

Premature Exit Before Age 60

Leaving NPS before age 60 is permitted for All Citizen and Corporate Model subscribers, and the earlier requirement of completing a minimum subscription period has been removed following the December 2025 PFRDA amendment. However, the conditions on how much you can take out remain. A minimum of 80% of your corpus must go towards purchasing an annuity from a PFRDA-approved provider. You can take only the remaining 20% as a lump sum.

One exception applies: if your total corpus at the time of exit is ₹2.5 lakh or less, you can withdraw everything as a lump sum with no annuity requirement. The lump sum you receive on premature exit is taxable at your income tax slab rate, and the pension income from the annuity is also taxable in each year you receive it.

Normal Exit at Age 60 (Superannuation)

The rules here differ depending on whether you are a government employee or a non-government subscriber.

For All Citizen Model and Corporate NPS subscribers, the December 2025 amendment has changed the exit structure. Up to 80% of the corpus can now be taken as a lump sum, with only 20% required to go towards purchasing an annuity. This applies to subscribers who have completed at least 15 years in NPS or have attained age 60. If the total corpus is ₹8 lakh or less, the entire amount can be withdrawn as a lump sum with no annuity requirement. For corpus between ₹8 lakh and ₹12 lakh, up to ₹6 lakh can be taken as a lump sum, with the remaining balance available through a Systematic Lump Sum Withdrawal, Systematic Unit Redemption, or annuity purchase.

It is worth noting that while PFRDA now permits up to 80% as a lump sum, the Income Tax Act currently provides an explicit tax exemption only for 60% of the withdrawal. The additional 20% may be taxable at your applicable slab rate unless the Ministry of Finance issues a specific clarification.

For government sector subscribers, the earlier 60/40 structure continues to apply. At least 40% of the corpus must be used to buy an annuity, and the remaining 60% can be taken as a lump sum. The annuity purchase is tax-free, but the monthly pension it generates is treated as income and taxed at your slab rate in the year you receive it.

Another possibility would be for you to remain in NPS and continue with your contributions even after reaching the age of 60, up to the age of 85. Those who do not want to withdraw their funds in one lump sum can opt for the Systematic Lump Sum Withdrawal scheme.

Tier 2 Account: Flexible Withdrawals, Fewer Restrictions

Tier 2 is a voluntary account attached to your NPS. There are no restrictions on how much you withdraw, how often, or for what purpose. You can pull money out whenever you need it.

This is a trade-off from a taxation point of view. The contributions made towards the Tier 2 scheme do not earn exemptions from Section 80C or Section 80CCD deductions. Withdrawals will be subject to capital gain taxes depending on the duration the contribution is held. If the holding period exceeds 24 months, then it will incur a 12.5% tax rate. Anything redeemed before the 24-month mark is treated as short-term capital gain and taxed at your applicable slab rate. When you close your Tier 1 account and exit NPS, the Tier 2 account closes automatically as well.

Death of a Subscriber: Withdrawal Rules for Nominees

When a subscriber passes away, the rules depend on which sector they belonged to and the size of the corpus.

For subscribers under the All Citizens and Corporate sector, the entire corpus is paid to the nominee or legal heir as a lump sum, fully exempt from tax. The nominee can also choose to use the money to buy an annuity for a regular income, but that is entirely optional.

The eligibility conditions for subscribers in the government sector depend on the size of the corpus. In case the corpus is ₹5 lakh or below, the nominee can claim the entire corpus in one lump sum. In case the corpus exceeds ₹5 lakh, 80% of it has to be placed in an annuity for monthly pension payments, normally to the spouse, while the rest 20% is paid in one lump sum.

Under the updated PFRDA exit regulations, where the corpus is ₹8 lakh or less, the entire amount can be withdrawn as a lump sum. For corpus between ₹8 lakh and ₹12 lakh, up to ₹6 lakh can be taken as a lump sum, with the balance available through systematic payouts or annuity. Where the corpus exceeds ₹12 lakh, the standard annuity allocation rules apply based on the subscriber's category and exit scenario.

A nominee has to send a death withdrawal form along with their KYC documents and bank account details. The fund gets deposited into the nominee's registered account via an electronic transfer process. In case a nominee is below the age of 18 years, the appointed guardian has to fill the form on their behalf along with the minor's birth proof.

Tax Treatment: A Quick Summary

Withdrawal amounts for all Citizen and Corporate members are eligible for up to 80% at maturity, although not more than 60% is actually tax-exempt according to the Income Tax Act. Withdrawals for the 20% that will be invested in annuities are exempt from taxation at the time of withdrawal, while the amount generated as pensions will be taxable income.

Subscribers belonging to the Government sector continue to get their 60% lump sum without paying any tax on the same. Partial withdrawals from the corpus during the accumulation period have not been subjected to taxation. Upon early termination of the policy, the 20% lump sum withdrawal shall be taxed according to your slab. Upon death, nominees/legals of All Citizens & Corporate shall enjoy tax-free corpus.

Conclusion

Through NPS, an individual gets a structured approach to saving for retirement, with varying methods of withdrawal depending on the stage of life. At Tier 1, contributions are regulated with controlled withdrawals, while Tier 2 offers greater flexibility but is less tax-efficient. The December 2025 PFRDA amendments have meaningfully improved exit options for non-government subscribers, though the tax framework under the Income Tax Act is yet to fully align with the new withdrawal limits. It is essential to understand these details before making any withdrawal decisions.