NPS annuitization rules explained
Why 40% of your NPS corpus must buy an annuity, and what your options are.
“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NPS subscribers fall under), the December 2025 regulations introduced size-based tiers instead: smaller corpuses can be withdrawn entirely as a lump sum with no mandatory annuity at all, while only the largest corpuses face a mandatory annuity portion, capped at 20%, not 40%.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
Using the real tier logic from computeNps: a corpus of ₹8,00,000 or less can be withdrawn as a 100% lump sum, with no annuity required at all. Between ₹8 lakh and ₹12 lakh, a flat ₹6,00,000can be taken as a lump sum: on a ₹10,00,000 corpus, that’s 60% lump sum, 40% annuity. Above ₹12,00,000, up to 80% can be taken as a lump sum: for a ₹50,00,000 corpus, that works out to ₹40,00,000 as a lump sum and only ₹10,00,000, or 20%, mandatorily annuitized. A government employee with the identical ₹50,00,000 corpus, by contrast, is locked into the older 60%/40% split regardless of size.
Estimate the monthly payout you'd receive from an annuity purchase.
Project your National Pension System corpus and expected annuity.
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.
Don’t assume your entire lump sum withdrawal is tax-free just because PFRDA permits it. Check where your projected corpus falls against both the withdrawal tier and the separate 60% tax-exemption cap before counting on a specific take-home number.
All figures are indicative and for educational purposes only, not financial advice.
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