NPS annuitization rules explained

“40% of your NPS corpus must buy an annuity” is one of the most commonly repeated facts about the National Pension System — and it’s no longer the rule for most subscribers. PFRDA overhauled the exit rules in December 2025, replacing the old flat 40% with a system that depends on how large your corpus actually is.

The ‘40%’ rule isn’t universal anymore

The flat 60% lump sum / 40% mandatory annuity split still applies — but only to government employees, under an older, separate rule PFRDA left untouched. For everyone else — the “All Citizen Model” most private-sector NPS subscribers fall under — the December 2025 regulations introduced size-based tiers instead: smaller corpuses can be withdrawn entirely as a lump sum with no mandatory annuity at all, while only the largest corpuses face a mandatory annuity portion, capped at 20%, not 40%.

How much must go to annuity, by corpus size

The tax-free cap that didn’t move with it

PFRDA raising the lump sum ceiling didn’t come with a matching change to the tax rules. Section 10(12A) of the Income Tax Act still exempts only 60% of your total corpus— not 60% of whatever you actually choose to withdraw. Any lump sum percentage above that 60% mark is taxed at your slab rate, which creates a counterintuitive result: it hits the smallest corpuses hardest. The ≤₹8 lakh tier’s 100% lump sum leaves a full 40 percentage points taxable, twice the 20-point gap the 80% tier creates for much larger corpuses.