Exit, Withdrawal and Annuity under the NPS, including the 2025 Reforms

A pension system is judged by what it pays out. Under the NPS, the rules on exit, partial withdrawal and annuity decide how much of the corpus a subscriber may take as cash, how much must provide a lifelong income, and when. The PFRDA Act sets the framework; the detail lies in the PFRDA (Exits and Withdrawals under the National Pension System) Regulations, 2015, which were comprehensively amended in December 2025.

1. The Statutory Framework

• No exit except as specified: a subscriber may not exit the NPS except as provided by regulations (Section 20(2)).
• Compulsory annuity: on exit, the subscriber must use part of the corpus to purchase an annuity from a life insurer, as regulations specify (Section 20(2)).
• Partial withdrawals capped: withdrawals from the pension account before exit may not exceed 25 per cent of the subscriber's contributions (Section 20(2)).
• Regulation-making power: PFRDA makes regulations on withdrawals, exit and the conditions for purchasing annuities under Section 52.

Because the Act leaves the proportions and ages to regulations, they have been changed several times without amending the Act. The consistent policy is that the NPS exists to provide income in old age, not merely a lump sum, though the balance between the two has shifted towards flexibility.

2. Normal Exit: Non-government Subscribers

After the 2025 amendment, a non-government subscriber makes a normal exit on attaining sixty years or superannuation, or after completing fifteen years in the NPS. The rules depend on the size of the corpus (the accumulated pension wealth):

• Above ₹12 lakh: at least 20 per cent must be used to buy an annuity. Up to 80 per cent may be taken as a lump sum, through systematic withdrawals or systematic unit redemption, or in other approved ways. Before the amendment, at least 40 per cent had to be annuitised.
• Above ₹8 lakh and up to ₹12 lakh: the subscriber may take up to ₹6 lakh as a lump sum, and the balance through systematic unit redemption spread over at least six years, an annuity, or a combination.
• Up to ₹8 lakh: the entire corpus may be withdrawn as a lump sum or through systematic withdrawals, with no compulsory annuity.

3. Normal Exit: Government Subscribers

• Annuity: at least 40 per cent of the corpus must be used to buy an annuity, as before.
• Lump sum: the balance, up to 60 per cent, may be withdrawn as a lump sum or through periodic withdrawals.
• Continuation: Government subscribers may remain in the NPS after retirement until eighty-five.
• Unified Pension Scheme: Central Government employees who opt for the UPS receive an assured payout under its rules instead, and different provisions apply to their corpus.

4. Premature Exit

• Meaning: exit before the conditions for normal exit are met.
• Rule: at least 80 per cent of the corpus must be used to buy an annuity; only the balance may be taken as a lump sum.
• Small corpus: if the corpus is ₹5 lakh or less, the whole of it may be withdrawn.
• Rationale: the high annuity requirement discourages subscribers from treating the NPS as a short-term savings scheme and protects the purpose of retirement saving.

5. Deferment and Late Entry

• Deferment to eighty-five: a subscriber may defer the lump sum, the annuity purchase, or both, and continue in the NPS up to the age of eighty-five, raised in 2025 from the earlier limits.
• Joining after sixty: a subscriber who joins after sixty must annuitise at least 20 per cent on exit, but may withdraw the whole corpus if it is ₹12 lakh or less.

6. Partial Withdrawals

• Statutory cap: up to 25 per cent of the subscriber's own contributions, excluding employer contributions and returns.
• Waiting period: available after a minimum period in the NPS, ordinarily three years.
• Number: up to four partial withdrawals before sixty for non-government subscribers, following the 2025 amendment, with a separate limited number for those continuing beyond sixty.
• Grounds: specified purposes, such as higher education or marriage of children, purchase or construction of a house, treatment of specified illnesses or medical treatment, disability, skill development, starting a business, and settlement of a loan taken against the NPS.

7. Loans against the NPS

The 2025 amendment allows a subscriber to pledge the NPS account to a regulated financial institution as security for a loan of up to 25 per cent of his own contributions. This gives liquidity in an emergency without breaking the lock-in, and a partial withdrawal may be used to settle the loan.

8. Death and Missing Subscribers

• Death before exit: the entire corpus is paid to the nominee or legal heirs. For non-government subscribers, the nominee may take it wholly as a lump sum or use it wholly for an annuity.
• Government subscribers: the family may be entitled to benefits under the Government's own rules, including the option of family pension where applicable.
• Missing subscriber: nominees may receive 20 per cent as interim relief; the balance is settled once the subscriber is presumed dead in law, after seven years under the law of evidence.

9. The Annuity

• Provider: the annuity is bought from a life insurance company regulated by IRDAI and empanelled by PFRDA as an annuity service provider.
• Types: the subscriber chooses among types such as a life annuity, a joint life annuity for the spouse, and annuities with return of purchase price to the nominee.
• Income: the annuity provides a regular pension for life; annuity income is taxable in the hands of the recipient under the income tax law.
• Regulatory interface: the annuity is an insurance product, so its pricing and terms fall under IRDAI, while PFRDA regulates the exit process. This divided responsibility is a recognised source of difficulty.

10. Questions Arising

Can a regulation remove the annuity requirement altogether?

Not for all subscribers. Section 20(2) requires an annuity to be purchased on exit in the manner specified by regulations. Regulations may fix the proportion and exempt small corpuses, as they do for corpuses up to ₹8 lakh, because a very small annuity would be of little use. But a regulation abolishing the annuity for every subscriber would contradict the Act.

Why do Government subscribers face a higher annuity requirement?

Government contributions are a substitute for the defined benefit pension that earlier employees received. Requiring a larger share to be annuitised ensures that this public money continues to provide lifelong income in old age, rather than being spent at retirement.

Does the subscriber lose the corpus used to buy an annuity?

That depends on the annuity chosen. Under a simple life annuity, payments stop on death. Under an annuity with return of purchase price, the amount used is returned to the nominee on death, though the periodic pension is lower.

11. Related Topics and Provisions

• The National Pension System (Section 20)
• Death, disability, nomination and unclaimed amounts
• Annuities and the role of IRDAI
• The Unified Pension Scheme
• Taxation of the NPS