The NPS lump sum tax mismatch, worked through

NPS’s exit-tier rules decide how much of a corpus can be taken as a lump sum. A completely separate rule decides how much of that lump sum is actually tax-free. The two aren’t written to match each other, and for most exit tiers, they don’t — leaving a gap that’s easy to miss until it shows up as tax owed.

Two separate rules that don’t line up

The exit-tier ceiling — the corpus-size tiers introduced in December 2025 — sets how much of a corpus a subscriber is allowedto withdraw as a lump sum, anywhere from 100% down to 80% depending on the corpus. Section 10(12A) sets a completely different number: regardless of which tier applies, only 60% of the total corpus is tax-exempt as a lump sum. That 60% figure predates the December 2025 reform entirely: it’s the same cap that existed under the old flat rule, just now sitting alongside exit-tier ceilings that can allow withdrawing well past it.

The top tier: 80% allowed, only 60% tax-free

A ₹20,00,000 corpus sits in the top exit tier, where 80% — ₹16,00,000 — can be taken as a lump sum. But the tax-free cap stays fixed at 60% of the total corpus: ₹12,00,000.

The small-corpus tier is actually worse, proportionally

It’s tempting to assume this mismatch is a large-corpus problem, since the 80% figure gets most of the attention. It isn’t. A corpus of ₹8,00,000 or less falls into the tier that allows a full 100% lump sum — and the same fixed 60% tax-free cap applies there too, leaving a proportionally larger gap than the top tier ever has.

The exit-tier reform made small corpora free of the annuity requirement entirely, which is a genuine win. But it didn’t touch the 60% tax-free cap underneath it, so the tier that looks most generous on paper — 100% withdrawable — is actually the one where the largest share of the withdrawal ends up taxable. Checking the exit-tier ceiling alone isn’t enough to know what a lump sum will actually net; the 60% cap needs checking separately, every time.