The 60 / 40 split, and why each side is taxed differently
When you exit the NPS at retirement, the corpus you built up is divided in two, and the tax treatment of each half is the whole story.
Up to 60% can be taken as a lump sum, and that portion is exempt from tax under Section 10(12A) — it comes to you free of Indian tax. The remaining 40% (at least) must be used to buy an annuity, which is a contract with an insurer that pays you a regular pension. Buying the annuity is not itself a taxable event; you are not taxed on the 40% at the point it converts into the pension product. What is taxable is the pension you then receive from that annuity — each payment is income in the year you get it, taxed in the normal way.
| Portion of corpus | At exit | Later |
|---|---|---|
| Up to 60% — lump sum | Tax-exempt (Section 10(12A)) | — |
| At least 40% — annuity | Not taxed on purchase | Pension taxed as income when received |
So the design front-loads the tax relief: the big lump sum is exempt, and the tax instead arrives slowly, as pension income, over the years you draw it. For an NRI, where and how that future pension is taxed depends on your residential status and your country of residence when the payments come.
Full withdrawal, partial withdrawal, and continuing the account
Not every exit forces the 60/40 split. Where the total corpus is small (the scheme sets a low-value threshold), you may be allowed to withdraw the whole amount as a lump sum rather than being made to buy an annuity — sensible, because a tiny annuity would pay a trivial pension. The exact threshold is set by the regulator and changes from time to time, so it is checked against the rules current at your exit rather than assumed.
Before you exit altogether, NPS also allows limited partial withdrawals for specified purposes — things like a child's education, a medical emergency, or buying a house — subject to conditions on how long you've contributed and how much you can take. These specified partial withdrawals carry their own exemption (Section 10(12B)). They are not a general ATM; they are tightly defined.
As for keeping the account, an NRI can generally continue an existing NPS account and keep contributing, or choose to close it. What you cannot do is treat the choice casually — exiting early, continuing to a later age, or closing it each lands differently on tax and on the size of the eventual pension. The right move depends on your age, your corpus and where you'll be tax-resident when the money is paid.
A worked example: exiting NPS after a move to the UAE
Sunita worked in India for fifteen years, built an NPS corpus of about ₹40 lakh, and moved to the UAE. She reaches the scheme's exit age and decides to take the standard route rather than continue.
She takes 60% — ₹24 lakh — as a lump sum, and under Section 10(12A) that amount is exempt from Indian tax; it comes to her in full. The remaining 40% — ₹16 lakh — buys an annuity, and that purchase is not taxed. From then on she receives a monthly pension from the annuity, and each payment is income in the year she receives it. Because she is in the UAE, how that pension is taxed in practice turns on her residential status and the India–UAE position when the payments arrive — her CA maps that out so there are no surprises.
Had Sunita's corpus been very small instead, she might have been allowed to withdraw the whole amount as a lump sum and skip the annuity entirely. And had she needed money mid-way for, say, a medical emergency, a limited partial withdrawal under the specified-purpose rules (with its own exemption under Section 10(12B)) could have been available without a full exit.