NPS Withdrawal Rules for Government & Corporate Employees

In summary

• Government and non-government rules are different: At normal exit, government-sector subscribers generally have a minimum 40% annuity requirement, whereas eligible non-government subscribers have a minimum 20% annuity requirement under the July 2026 framework. 
• New corpus thresholds apply: For normal exit, government subscribers can withdraw the entire corpus where it does not exceed Rs. 8 lakh. Non-government subscribers have a similar Rs. 8 lakh threshold. The Rs. 5 lakh threshold continues to apply to certain premature-exit provisions. 
• Partial withdrawals remain limited: Up to 25% of eligible own contributions can be withdrawn for specified purposes, subject to the applicable frequency and interval rules. 
• Tier 2 is more flexible: An active Tier 2 account can generally be withdrawn from fully or partly at any time. The Tier II Tax Saver account remains subject to its prescribed lock-in. 
• Tax treatment is separate from withdrawal eligibility: Under the Income Tax Department's guidance, qualifying NPS closure/exit payments are exempt up to 60% of the amount payable, while eligible partial withdrawals are exempt up to 25% of employee contributions.

The National Pension System (NPS) is a defined-contribution retirement savings system regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Subscribers accumulate pension wealth in their NPS account and can access it through permitted partial withdrawals or exit-related withdrawals.

For withdrawal purposes, it is useful to distinguish between Tier 1 and Tier 2:

• Tier 1: The primary retirement account, where withdrawals are subject to PFRDA conditions.
• Tier 2: A voluntary account that generally permits full or partial withdrawals at any time while active, subject to applicable scheme conditions. 

The applicable exit rules can differ for government-sector and non-government-sector subscribers. The July 2026 amendment is particularly relevant for corporate employees because the normal-exit annuity requirement for eligible non-government subscribers is now generally 20%, rather than the earlier 40% framework.

The July 2026 PFRDA regulations also allow eligible subscribers to use approved alternatives such as systematic lump-sum withdrawal (SLW) and systematic unit redemption (SUR) instead of taking the entire permissible amount immediately.

What happens to a government employee's NPS corpus at retirement?

A government-sector subscriber who reaches superannuation or retirement generally remains within NPS until an exit is exercised. At exit, at least 40% of accumulated pension wealth is used for the applicable annuity arrangement, while the balance can be received as a lump sum or through approved periodic payout mechanisms.

The regulations also permit a government subscriber to defer annuity purchase or withdrawal of the lump-sum portion, subject to the applicable framework, with the current regulations allowing continuation within NPS up to age 85.

What happens to a corporate employee's NPS corpus at retirement?

For eligible non-government subscribers, the normal-exit framework is different. At age 60, superannuation or after satisfying the applicable minimum subscription period, at least 20% of accumulated pension wealth is generally used to purchase an annuity. The remaining amount can be received as lump sum or through approved periodic payout options.

A corporate subscriber who reaches retirement can continue within NPS under the All Citizen Model unless an exit is exercised.

• Consider a government-sector subscriber with an accumulated pension wealth of Rs. 50 lakh at retirement.
• Under the government-sector normal-exit framework:
• Total accumulated pension wealth: Rs. 50 lakh
• Minimum annuity allocation: 40% = Rs. 20 lakh
• Balance available for lump sum or approved periodic payout: 60% = Rs. 30 lakh
• The Rs. 20 lakh used for an annuity is used to generate periodic pension income according to the selected annuity option. The Rs. 30 lakh balance can be taken as permitted under the applicable withdrawal rules.

For a corporate subscriber with the same Rs. 50 lakh corpus at normal exit, the minimum annuity allocation would generally be 20%, or Rs. 10 lakh, with the remaining Rs. 40 lakh available as lump sum or through permitted payout options.

NPS withdrawal eligibility and tax treatment are separate matters.

The Income Tax Department states that payment from the NPS Trust on closure of an NPS account or opting out is exempt under Section 10(12A) to the extent it does not exceed 60% of the total amount payable at closure or opting out. It also states that eligible partial withdrawals are exempt under Section 10(12B) to the extent of 25% of employee contributions.

This means the applicable PFRDA withdrawal percentage should not automatically be treated as the tax-exempt percentage. For example, a non-government subscriber may have a larger permissible lump-sum withdrawal under the 2026 PFRDA framework, but the tax treatment should be determined separately under the prevailing Income Tax provisions.

The annuity purchase itself is not treated in the same way as the taxable pension received subsequently. Annuity income received by the subscriber is generally taxable according to the applicable income-tax rules.

Tier 2 offers greater liquidity than Tier 1.

An active Tier 2 subscriber can generally withdraw the accumulated wealth in full or in part at any time, subject to applicable charges and scheme conditions. There is no prescribed limit on the number or amount of withdrawals while sufficient balance remains in the account.

However, the NPS Tier II Tax Saver Scheme has a separate lock-in requirement. Therefore, the statement that every Tier 2 account has zero lock-in would not apply to the Tax Saver variant.

NPS withdrawal claims are processed through the mechanisms prescribed by PFRDA and the relevant Central Recordkeeping Agency (CRA), NPS Trust, nodal office or authorised intermediary.

The subscriber generally needs to:

1. Check whether the withdrawal is a partial withdrawal, normal exit or premature exit.
2. Verify the applicable corpus and annuity requirements.
3. Complete the prescribed withdrawal or exit request.
4. Provide the required bank and supporting documentation.
5. Complete authentication and verification requirements.
6. Select the applicable annuity or permitted payout option, where required.
7. Track the claim until settlement.

The exact process can vary according to the subscriber's sector and the withdrawal type, so the applicable CRA and PFRDA instructions should be checked before submitting a claim. PFRDA regulations require withdrawal applications and supporting documentation to be submitted in the prescribed manner.

NPS withdrawal limit for Tier 1 account

As opposed to Tier 2 withdrawals, withdrawals from NPS Tier 1 accounts are subject to various rules and limits. As a subscriber, you are permitted to make partial and complete withdrawals only under certain conditions. Moreover, NPS Tier 1 withdrawals place a cap on the amount that can be withdrawn and the minimum lock-in period.
 

Also Read: How to Invest in NPS Online

The NPS withdrawal framework in 2026 is no longer accurately represented by a single 60:40 rule for every subscriber.

For a government-sector subscriber, the normal retirement framework generally requires at least 40% of accumulated pension wealth to be used for annuity, with the remaining amount available through lump-sum or approved periodic payout options.

For an eligible corporate or other non-government subscriber, normal exit generally requires only 20% to be used for annuity, leaving up to 80% for lump-sum or approved periodic payout options.

Partial withdrawals remain capped at 25% of eligible own contributions, but the 2026 rules have changed the frequency and interval framework.

NPS withdrawal rules at a glance