NPS final withdrawal
PFRDA's exit rules for closing an NPS account: a mandatory minimum annuitisation, small-corpus exceptions letting the whole balance be withdrawn, and a tax exemption of up to 60% of the corpus.
In plain language
Closing an NPS account is not as simple as asking for the money back. PFRDA's exit and withdrawal rules decide how much of the final corpus must buy a pension for life, and how much can simply be paid out.
The size of the corpus itself changes the answer. A very small NPS balance is allowed to come out entirely as cash. A larger one is not; part of it must always go towards an annuity, so the subscriber does not outlive their savings.
How it works
On retirement, at 60 or superannuation, the general rule is a minimum 20% of the accumulated pension wealth used to buy an annuity, 40% for Government-sector subscribers, with the balance taken as a lump sum or paid out systematically. If the subscriber does not choose to exit, NPS continues automatically to age 85.
Small-corpus exceptions at normal exit:
| Corpus at exit | Rule |
|---|---|
| Up to Rs 8 lakh | Entire corpus may be withdrawn, lump sum or systematic |
| More than Rs 8 lakh, up to Rs 12 lakh | Up to Rs 6 lakh may be withdrawn; the balance must go to annuity or systematic unit redemption over at least 6 years |
Exit before 60, resignation, or leaving before 15 years' subscription: at least 80% must buy an annuity, unless the corpus is Rs 5 lakh or less, in which case the whole amount may be withdrawn.
Joining after 60, up to age 85: at least 20% must be annuitised; the whole corpus may be withdrawn if it is Rs 12 lakh or less.
On death before exit, the entire corpus goes to the nominee or legal heir, as a lump sum, systematic payout, or an annuity if they choose.
Deferment. A subscriber may defer the lump sum, the annuity purchase, or both, up to age 85.
Tax, section 10(12A). Up to 60% of the total corpus withdrawn at closure or on opting out is fully exempt. The exemption is deliberately set to match the 60% the NPS scheme itself allows as lump sum, so the whole permitted lump sum arrives tax-free. The remaining amount used for an annuity is not taxed on purchase, but the pension it later pays is taxable in the year received.
A worked example
Mrs Bhandari retires at 60 with an NPS corpus of Rs 45,00,000, well above the Rs 12 lakh small-corpus threshold, so the general rule applies.
Mandatory annuitisation, minimum 20% = Rs 9,00,000
Available as lump sum or systematic pay-out = Rs 36,00,000
Tax-exempt portion, up to 60% of corpus = Rs 27,00,000 (fully tax-free under section 10(12A))
She takes the full Rs 36,00,000 as a lump sum. Of this, Rs 27,00,000, being 60% of the corpus, is tax-free under section 10(12A); most subscribers keep the lump-sum withdrawal within the 60% band and annuitise the rest, exactly as PFRDA's own 20% minimum already requires.
Contrast Mr Ghosh, who exits at 60 with a corpus of just Rs 7,00,000, under Rs 8 lakh, so he may withdraw the entire Rs 7,00,000, with no compulsory annuity at all.
Why NISM asks about it
Chapter 5 (Retirement Products), 'Withdrawal and Exit Rules', sets out the full PFRDA framework, the 20%/40% annuitisation split, the Rs 8/12/6/5 lakh thresholds, and deferment to 85. Chapter 12 (Taxation of Other Products), section 12.3.2, supplies the section 10(12A) exemption on up to 60% of the corpus. Expect a numerical question naming a corpus size and asking how much must be annuitised or may be withdrawn outright, and a tax question on how much of a stated withdrawal is exempt.
Common exam traps
- The exit thresholds, Rs 8, 12, 6 and 5 lakh, are corpus-size tests, not age tests. Read the corpus figure in the question before applying the 20%, 40% or 80% rule.
- Government-sector subscribers annuitise a minimum of 40%, not 20%. The general 20% rule is for everyone else.
- The section 10(12A) exemption caps at 60% of the corpus, in symmetry with the scheme's own 60% lump-sum allowance. It is not a blanket exemption on whatever is withdrawn.
- Exit before 15 years' subscription needs at least 80% annuitised, sharply higher than the 20% or 40% at normal retirement, unless the small Rs 5 lakh exception applies.
- Deferment can run to age 85, for the lump sum, the annuity purchase, or both, independently.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Immediate annuityAn annuity whose payments begin soon after it is bought — generally within 12 months — usually purchased with a single lump-sum premium at retirement.
- National Pension SystemA PFRDA-regulated, defined-contribution retirement scheme in which the subscriber builds a market-linked corpus and must convert part of it into an annuity at exit; there is no guaranteed return.
- NPS partial withdrawalTax-exempt withdrawal of up to 25% of an NPS employee's own contributions before final exit, though the workbook's own chapters disagree on how many times a subscriber may use it.
- Partially inflation-linked pensionA pension that adjusts to inflation only in part, as in the workbook's Case 4, where the pension rises by just 50% of inflation, leaving a shortfall the retiree must fund from other savings.