Ananya Nair (an illustrative profile) is 50 and works for a private bank in Bengaluru. Her NPS account has ₹45 lakh, and she adds ₹15,000 a month. Her husband Amit is 53 and runs a small consultancy with no pension of his own. Ananya assumes "40% of NPS must go into a pension" and has never asked what kind, or what happens to it if she dies before Amit.
The 40% rule changed in December 2025, and the exit choices are now wider than most people realise. Ananya's real question is not "how does NPS work?" but "what job should my NPS do in our retirement, and how should we take the money out?"
In this chapter
- The role NPS plays in a retirement plan, and how much of your plan it should carry
- The 2026 exit and small-corpus rules, in rupees
- The four decisions at exit: when, how much as a lump sum, which annuity, and where the lump sum goes
- A worked comparison of three exit routes for Ananya
NPS's job in your retirement plan
A quick recap: NPS is a market-linked pension account regulated by PFRDA. You choose a pension fund and an asset mix, costs are low, and the Tier I account stays largely locked until 60. The mechanics of PRAN, tiers, scheme choice and charges are covered in How NPS works, and the contribution tax benefits under each regime in NPS tax benefits.
Inside a retirement plan, NPS has three jobs. First, it is a long-term growth layer you cannot easily raid, which is why the money is often still there at 60. Second, part of it becomes a lifelong income floor through the annuity, the one source in most private-sector plans that cannot run out. Third, it gives flexibility at exit: you can take cash, phase it, or leave it invested.
What NPS should not do is carry money you may need before 60, or be your only retirement asset. Size it so the locked portion never forces you to borrow for a family need in your fifties.
The exit rules in 2026
"Normal exit" means leaving NPS at 60 or later. The rules below apply to eligible non-government subscribers; government-sector subscribers remain on a 60:40 split between lump sum and annuity.
| Corpus at normal exit | Lump sum allowed | The rest |
|---|---|---|
| Up to ₹8 lakh | Up to 100% | Nothing compulsory |
| ₹8 lakh to ₹12 lakh | Up to ₹6 lakh | Annuity, or systematic unit redemption over at least 6 years |
| Above ₹12 lakh | Up to 80% | At least 20% buys an annuity |
Two further rules widen the choice. You can stay invested up to age 85. And a PFRDA circular of 15 May 2026 set out Retirement Income Schemes, which pay the lump-sum portion out monthly, quarterly or yearly up to 85, from a date PFRDA notifies.
Allowed is not the same as tax-free: PFRDA decides what you may withdraw; the income-tax law decides how it is taxed. As of October 2026 the exemption covers lump-sum withdrawals of up to 60% of the corpus and had not been extended to the additional 20% now permitted, so treat that portion as potentially taxable until it is clarified. Annuity income is taxed at your slab rate every year.
The four decisions at exit
1. When to exit. If other income will cover spending for the first few years, deferring lets the corpus keep growing without annual tax. If NPS is a large part of your first-year income, you will probably need to start at 60.
2. How much as a lump sum. Taking 60% keeps the lump sum within the clearly exempt portion. Taking 80% gives more control but may add tax on the extra 20%. Taking less than 60% makes sense only if you want a larger guaranteed pension.
3. Which annuity. An annuity is a contract in which an insurer pays you a regular income for life in exchange for a lump sum. You buy it from a PFRDA-empanelled insurer, and the purchase generally cannot be reversed.
| Annuity type | How it pays | Who it suits |
|---|---|---|
| Life annuity | Highest starting income; stops on your death, nothing to heirs | Single people, or couples where the spouse has ample income |
| Life annuity with return of purchase price | Lower income; the amount you paid goes to your nominee on death | Those who want to leave the capital to the family |
| Joint-life, last survivor | Pays you, then continues to your spouse for life | Couples where one spouse depends on the other's pension |
| Joint-life with return of purchase price | Lowest income of the four; pays both lives, then returns the capital | Couples who want both survivor income and a legacy |
| Increasing annuity | Starts lower and rises by a fixed percentage each year | Those worried about inflation over a long retirement |
4. Where the lump sum goes. Idle cash loses ground to inflation, so decide in advance which part refills near-term income and which stays invested for growth, using the approach in Turning a corpus into a monthly income.
Worked example: three exit routes for Ananya
Assumptions (all illustrative): her ₹45 lakh and ₹15,000 a month grow at 9% a year for 10 years. A single-life annuity pays 6.5% a year and a joint-life, last-survivor annuity with return of purchase price pays 5.5%. If she defers, the corpus earns 8% a year. Actual returns and annuity rates will differ.
- Corpus at 60. ₹45 lakh at 9% for 10 years becomes about ₹1.07 crore, and the monthly contributions add about ₹29 lakh, for a total of about ₹1.35 crore.
- Route A, the old habit (60:40). Lump sum ₹81 lakh, all within the exempt portion. A ₹54 lakh single-life annuity at 6.5% pays about ₹29,250 a month, taxable, and stops if Ananya dies first.
- Route B, maximum flexibility (80:20) with spouse cover. Lump sum ₹1.08 crore, of which ₹27 lakh is potentially taxable; if taxed at 30% plus cess as a worst case, about ₹8.4 lakh. The ₹27 lakh joint-life annuity at 5.5% pays about ₹12,400 a month, continues to Amit, and returns ₹27 lakh to their nominee at the end.
- Route C, defer to 65. If Amit's consultancy covers their spending until then, the ₹1.35 crore left invested at 8% grows to about ₹1.98 crore by 65. The trade-off is five more years of market risk on the whole corpus.
Route A buys the biggest guaranteed income but leaves Amit exposed. Route B protects Amit and gives control, at a possible tax cost. Route C rewards patience but needs other income. A middle path is also possible: 60% as a lump sum, a joint-life annuity with the minimum 20%, and the last 20% left invested for later.
Matching the route to your situation
| If your situation is… | A route worth testing first |
|---|---|
| Little pension or rental income, and essentials must be covered for life | A larger annuity (more than 20%), on a joint-life basis if married |
| Strong other income for the first five years | Defer exit, or phase withdrawals |
| Spouse with no income of their own | Joint-life, last-survivor annuity, even at a lower rate |
| High slab rate in the year of exit | Stay within the 60% exempt portion until the tax position on the extra 20% is clear |
Common mistakes to avoid
- Assuming the full 80% lump sum is tax-free. Only 60% is explicitly exempt as of October 2026.
- Buying a single-life annuity by default. If your spouse depends on that income, it stops the day you die.
- Taking the maximum lump sum without a plan. Idle money in a bank account loses value to inflation.
- Accepting the first annuity quote. Rates and options differ between insurers, and the choice usually cannot be reversed.
Try this yourself: Log in to your NPS account and note your corpus and asset mix. Project it to 60 with the retirement calculator on the tools page. Then note 60% and 80% of it, and the monthly income from a 20% annuity at an assumed 6.5% (single life) and 5.5% (joint life). Ask who would live on what if you died first.
Frequently asked questions
How much can I withdraw from NPS at 60 in 2026?
Eligible non-government subscribers with a corpus above ₹12 lakh can take up to 80% as a lump sum and must use at least 20% for an annuity. A corpus up to ₹8 lakh can be withdrawn in full, and between ₹8 lakh and ₹12 lakh up to ₹6 lakh can be taken as a lump sum. Government-sector subscribers remain on the 60:40 split.
Is the NPS lump sum tax-free?
Up to 60% of the corpus is explicitly exempt. The additional 20% now permitted had not been covered by the exemption as of October 2026, so treat it as potentially taxable. Annuity income is added to your income and taxed at your slab rate.
Can I continue NPS after 60?
Yes. You can defer withdrawal and stay invested up to age 85, which suits people with other income in the early years of retirement. Market risk continues, so keep reviewing the asset mix.
Which NPS annuity option protects my spouse?
A joint-life, last-survivor annuity keeps paying your spouse after your death, and a version with return of purchase price also returns the capital at the end. Both pay less each month than a single-life annuity, so compare household income under each option, not just the rate.
For payout mechanics in more detail, read NPS payouts: RIS, annuity and systematic withdrawal and NPS after 60. Money n Wealth offers NPS account opening and servicing through a tie-up with a PFRDA-registered Point of Presence; see NPS with Money n Wealth.