Thinking of withdrawing 80% from NPS? Here’s what private sector employees must know about tax

Pension Fund Regulatory and Development Authority (PFRDA) has revamped the exit and withdrawal rules, allowing non-government subscribers of National Pension System (NPS) to withdraw up to 80 per cent of the fund accumulated at the time of exit.

While Pension regulator PFRDA allows an 80% lump-sum withdrawal, the Income Tax Act (as of late 2025) still only exempts 60%. This means the extra 20% might be taxed at your slab rate.

The withdrawal limit earlier was up to 60 per cent of the accumulated pension wealth, and the remaining was expected to be utilised for buying an annuity, providing for a monthly or any other periodical pension.

There is no one-size-fits-all answer. According to Rajarshi Dasgupta, Executive Director - Tax, AQUILAW, key factors to consider before withdrawing are:

1. Current tax slab: If you fall in the 5% or 10% slab (or have basic exemption + deductions available), the tax impact may be limited. In some cases, the effective tax could be quite low.
2. Liquidity requirements: Withdrawing the extra 20% may help if you need money for clearing high-interest loans, medical expenses, children’s education or marriage, starting a business or other essential goals. Avoiding expensive debt can also outweigh the tax cost.
3. Better investment opportunities: NPS annuities generally offer low returns and are fully taxable. If you can invest the lump sum in equity mutual funds, balanced funds, senior citizen savings schemes, etc. you may earn higher post-tax returns over time.

With the new rule, if you choose to withdraw more than 60%, the extra amount can be taxable in the year of withdrawal as per your income tax slab.

"So, while the higher withdrawal gives you more cash in hand, it can also mean a higher tax outgo, especially if it pushes you into a higher tax bracket. It’s helpful if you need money immediately, but from a tax point of view, withdrawing more is not always beneficial unless planned properly," said Abhishek Soni, CEO & Co-founder, Tax2win.