By IndiaHub 
Now, since they can withdraw 20% extra amount as lump sum, what will be their tax liability? Do they have to pay income tax on this extra 20% amount, or, will the entire 80% lump sum amount be tax exempted? ET Wealth Online spoke to several tax experts to get their insights on the matter.
Before we dive into how the 80% lump is taxed, let’s first look at the conditions that allow non-government subscribers to withdraw up to 80% of their corpus as a lump sum.
Also read: Major NPS rule change: 80% withdrawal from retirement corpus allowed at exit, 100% in some cases
When can non-govt subscribers withdraw 80% of the NPS corpus as lump sum?
In its circular about new NPS rules, PFRDA has described the conditions under which a non-government subscriber can withdraw up to 80% of their corpus in lump sum. These are the conditions-
| NPS exit options for non-government sector subscribers | ||||
| Exit scenario / event | Accumulated Pension Wealth (APW) at the time of exit (₹) | Lump sum (entire lump sum or systematic lump sum withdrawal or systematic unit redemption or other approved option) | Systematic unit redemption for at least six years | Annuity |
| Upon ≥ 15 years of subscription, or on attaining 60 years, or on superannuation as per regulation 4(1)(a) OR Upon physical incapacitation as per regulation 4(1)(d) | ≤ 8 lakh | 100% or Up to 80% | Not applicable | Not applicable or at least 20% |
| > 8 lakh ≤ 12 lakh | Up to 80% or Up to ₹6 lakh | Not applicable | At least 20% or Balance of APW remaining after lump sum | |
| > 12 lakh | Up to 80% | Not applicable | At least 20% | |
| Exit by individuals who joined on or after 60 years as per regulation 4(1)(e) | ≤ 12 lakh | 100% or Up to 80% | Not applicable | Not applicable or At least 20% |
| > 12 lakh | Up to 80% | Not applicable | At least 20% | |
Will 80% lump sum be tax-free for non-government subscribers?
Abhishek Soni, CEO & Co-founder, Tax2win, says that the additional 20% lump sum is not automatically tax-exempt as CBDT has not issued any clarification about it so far.
“The new NPS rule allows subscribers to withdraw up to 80% of the corpus as a lump sum, but tax exemption is governed by the Income Tax Act, not by PFRDA rules. At present, the Income Tax Act provides tax exemption only up to the limits specified earlier (commonly 60% at retirement),” says Soni.
“Unless the government amends the tax law or the CBDT issues a formal clarification extending the exemption, the extra 20% lump sum will be taxable as per existing income tax rules,” says Soni.
Also read: NPS changes:10 new rules you must know about NPS accumulation, growth and withdrawal
Gaurav Makhijani, Managing Partner, Makhijani Gera & Associates LLP, seconded Soni’s thoughts and said that the additional 20% corpus will be taxed till the government notifies the new rules.
“Section 10(12A) of the Income Tax Act, 1961, grants exemption only in respect of withdrawal of up to 60% of the accumulated corpus on normal exit. Thus, unless an amendment to the tax law is made, the additional 20% lump sum withdrawal will be taxable (as per applicable slab rates),” says Makhijani.
“The government may consider aligning the tax provisions with the revised NPS regulations to provide relief as was available on withdrawal until now. Until such changes are notified, subscribers would need to factor in taxability on the additional 20% of the corpus, with only 60% remaining tax-exempt out of the 80% withdrawal,” Makhijani said highlighting the current tax rule.
With Budget 2026 set to presented in early February next year, and the central government already being on a spree to frequently revamp NPS, can non-government subscribers expect Finance Minister Nirmala Sitharaman to make 80% lump sum withdrawal tax-free in her budget speech? Will the Income Tax Department take quick action to revise NPS taxation rules?
Makhijani says that the government may change the rule in Budget 2026.
“I think it should be (changed); the intention was to provide withdrawal of lump sum tax-free on retirement,” said Makhijani.