Money · May 3, 2026

NPS withdrawal rules 2026: Tier 1, Tier 2, exit conditions, and the actual taxation

How NPS withdrawals work in 2026 — Tier 1 vs Tier 2 differences, exit on retirement, partial withdrawals, premature exit, and the tax treatment.

By ByteLedger Team

NPS Tier 1 is great as a low-cost retirement vehicle — expense ratio of 0.09%, equity option up to 75% allocation, and the additional ₹50,000 deduction under 80CCD(1B) for old-regime filers. The tradeoff is liquidity. NPS Tier 1 is genuinely a retirement product, not a flexible long-term savings account, and the withdrawal rules in 2026 reflect that.

Here's exactly how withdrawals work, and what gets taxed when.

What changed in 2026

Normal exit lump-sum (60% at age 60) remains fully tax-free — this was confirmed in the FY24 Budget and unchanged in FY26.
Annuity portion (40%) continues to be mandatory at normal exit — no option to take all 100% lump-sum, even for small corpus (corpus under ₹5 lakh allows 100% lump-sum, though).
Online exit is now standard through eNPS, with annuity provider choice and PFM (pension fund manager) selection done at exit.

Tier 1 — the retirement account

Tier 1 has the tax benefits and the lock-in. Three exit pathways:

Normal exit (age 60 or after)

60% of corpus: lump-sum, fully tax-free
40% of corpus: must be used to buy an annuity from one of the empanelled annuity providers
Annuity payments are taxable as income (slab rate)

If corpus is ₹5 lakh or less at age 60, you can take 100% lump-sum tax-free.

You can defer the lump-sum withdrawal up to age 75, continuing to invest. You can also defer annuity purchase up to 3 years post-exit.

Premature exit (before age 60)

Subscriber must have 5 years of NPS subscription:

20% of corpus: lump-sum (tax-free if conditions met)
80% of corpus: must be used to buy annuity

This is the rule that catches most people off-guard. If you start NPS at 30 and want to exit at 50, 80% of the corpus is locked into an annuity for life — at whatever low annuity rate is available then.

If corpus is ₹2.5 lakh or less at premature exit, 100% lump-sum is allowed.

On death (before exit)

Nominee gets 100% corpus tax-free, no annuity purchase required.

Partial withdrawal — the small flexibility window

After 3 years of subscription, you can do partial withdrawals from your own contribution (not employer's contribution). Capped at 25% of own contributions, max 3 times across the account's lifetime.

Allowed reasons: higher education of self/children, marriage of children, purchase / construction of first house, treatment of specified illnesses, skill development, starting venture / business.

Partial withdrawals are tax-free.

Tier 2 — the optional, no-lock-in account

Tier 2 is a voluntary savings facility on top of Tier 1. No tax benefits (except for government employees with a 3-year lock-in option). No lock-in, withdraw anytime.

Effectively Tier 2 is a low-cost mutual fund — same expense ratios and PFMs as Tier 1, but mutual funds outside NPS are usually more transparent and easier to operate. Most retail investors don't actively use Tier 2.

Comparison: Tier 1 exit options

Scenario	Lump-sum	Annuity	Tax on lump-sum	Tax on annuity
Normal exit at 60	60%	40%	Tax-free	Slab
Premature exit (after 5 yr)	20%	80%	Tax-free	Slab
Death	100% to nominee	0%	Tax-free	N/A
Corpus ≤ ₹5L at 60	100%	0%	Tax-free	N/A

How NPS taxation actually compares to alternatives

For a retirement-only horizon, NPS Tier 1 looks competitive — equity exposure up to 75%, 0.09% expense ratio, additional ₹50k deduction (old regime). The 40% annuity drag is the cost.

For someone willing to forgo the 80CCD(1B) benefit (especially new-regime filers), a self-managed mutual fund SIP equivalent often gives more flexibility for similar net returns.

FAQ

Can I exit and re-enter NPS? Yes — once exited, you can re-enroll. But the corpus rule resets, and any tax benefits taken under 80C will not be reversed.

What is the minimum annuity I have to buy? Whatever the 40% (or 80% in premature exit) translates to in your case. Annuity providers offer multiple options — single life, joint life, with/without return of purchase price. The ROP variants give lower monthly payment but pay back the corpus to nominee.

Are annuity rates competitive in 2026? Roughly 6.5–7.0% for SPIA without ROP, 5.5–6.0% with ROP. Reasonable, not generous. Compare across LIC, HDFC Life, ICICI Prudential at exit time.