What happens to your NPS, and the tax, when an NRI exits the scheme

Which rule applies to you depends on whether your NPS account is a government one or a private one. Most NRIs hold a private account, opened as an individual or through a former employer, not a government job.

Government-sector subscribers take up to 60% as a lump sum and put at least 40% into an annuity. That is unchanged. Private (non-government) subscribers got more room from a December 2025 PFRDA change: they can now take up to 80% as a lump sum, with only 20% forced into an annuity (down from 40%). The annuity is a contract with an insurer that pays you a regular pension.

You don't have to take the maximum. You can take less as a lump sum and put more into the annuity if you want a larger pension. The next section explains why taking the full 80% does not mean 80% lands in your hands tax-free.

Here is the point most people miss. PFRDA raised the lump-sum limit, but the tax law did not change with it.

Section 10(12A) still exempts only 60% of the corpus. So even though a private subscriber can withdraw 80% in cash, only the first 60% is tax-free. The slice between 60% and 80%: that extra 20%, is taxable at your normal slab rate as income in the year you take it.

Until the tax law is amended to match the new rule, this gap stays. So the real choice for a private subscriber is whether the extra cash now is worth the tax on it, taking exactly 60% keeps the whole lump sum tax-free; taking 80% buys liquidity at a slab-rate cost on the top slice. For an NRI, where that taxable slice and the later pension fall also depends on your residential status and your country of residence.

The 80/20 rule is the top tier. For smaller corpuses, a private subscriber gets simpler choices at a normal exit. The thresholds below are set by the regulator and can change, so they're confirmed against the rules in force at your exit.

There's also flexibility on timing. Under Systematic Lump-sum Withdrawal (SLW), you don't have to take the lump sum all at once. You can draw it in installments (monthly, quarterly, yearly) up to age 75 while the rest stays invested. That can spread the slab-rate tax on the 60%-to-80% slice across years instead of bunching it into one.

Before exit, NPS also allows limited partial withdrawals for specified purposes: a child's education, a medical emergency, buying a house, subject to conditions on contribution period and amount. These carry their own exemption (Section 10(12B)). They are tightly defined, not a general withdrawal facility.

An NRI can keep an existing NPS account and contribute, or close it. Exiting early, continuing to a later age, or closing each lands differently on tax and on the eventual pension, so the right move depends on your age, corpus and where you'll be tax-resident.

Sunita worked in India for fifteen years, built a private NPS corpus of about ₹40 lakh, and moved to the UAE. She reaches the exit age and wants as much cash as she can.

Under the new rule she can take 80%: ₹32 lakh, as a lump sum, and put 20%: ₹8 lakh, into an annuity. But the ₹32 lakh is not all tax-free. Section 10(12A) exempts only 60% of the corpus, which is ₹24 lakh. The next slice, the ₹8 lakh between 60% and 80%, is taxed at her slab rate. So of the ₹32 lakh she takes, ₹24 lakh is tax-free and ₹8 lakh is taxable.

Had Sunita wanted to keep it all tax-free, she could have taken only ₹24 lakh (60%) as a lump sum and put more into the annuity. The ₹8 lakh annuity buys a monthly pension, taxable in the year she receives it; because she is in the UAE, how that pension and the taxable slice are treated turns on her residential status and the India, UAE position, her CA maps that out. A very small corpus could have been taken fully in cash instead, and a mid-way medical emergency could have allowed a partial withdrawal under Section 10(12B) without a full exit.

Yes. An NPS Tier I account opened while you were resident stays open after you become an NRI, under the same PRAN. You don't have to close it just because you moved.

You can keep contributing. The one change is the money's route: contributions now come from your NRO or NRE account, not a resident savings account. Keep the account active with the minimum yearly contribution (₹1,000 into Tier I), miss it and the account freezes until you pay a small reactivation charge plus the shortfall.

What the funding account decides is whether the money can later leave India:

The rest works as it did when you were resident, same investment choices, same exit rules. When you return to India for good the account simply flips back to resident status; the PRAN and balance carry on unchanged.

Leaving before the normal exit age used to push most of the corpus into the annuity. The December 2025 change relaxed this for private subscribers too.

For a private subscriber, a premature exit now broadly follows the same 80% lump sum / 20% annuity shape once the corpus is above a small regulator-set floor, and the old five-year minimum subscription before you could exit early has been removed. Below that small floor, you can take the whole amount in cash and skip the annuity. The exact thresholds are set by the regulator and have been revised, so they're confirmed against the rules in force when you exit rather than a remembered figure.

The tax treatment doesn't change with the exit type: the 60% tax-free cap under Section 10(12A) still applies, the slice above 60% is taxed at slab, and the annuity's later pension is taxed as income when paid.

The annuity pays you a pension, and each payment is taxable income in India in the year you receive it. Because you're an NRI, the insurer deducts tax at source before paying you. That's TDS under Section 195, the rule for an NRI's Indian income.

The default deduction can be steep. A tax treaty between India and your country of residence can cut it, and sometimes the treaty gives your home country the right to tax the pension instead. To get the treaty rate you give the annuity provider two things:

From FY2026-27, under the Income-tax Act 2025, Form 10F is replaced by Form 41 : filed online, with the TRC attached. Without these, the insurer applies the higher non-treaty rate, and you'd have to claim the excess back by filing a return. Get the paperwork to the provider before the pension starts and the right rate is applied from the first payment.

The exit itself is started online: you raise an exit request in the CRA system (Protean/NSDL or KFintech), "Manage My Withdrawal > Exit from NPS", and submit the withdrawal form with your KYC and bank proof. Once that's processed, taking the money abroad runs through your NRI bank accounts, not a one-off transfer.

The lump sum is paid into your Indian account on exit. From an NRE account it moves abroad freely. From an NRO account it goes within the yearly NRO remittance limit, with the usual remittance paperwork (your CA's certificate confirming tax is settled). The annuity pension lands in the same way: each payment credited to your NRO or NRE account and remitted out under the same channel.

Before any of this works cleanly, the housekeeping has to be right:

- Bank account converted to NRO / NRE : a resident account left open is the usual cause of a blocked payout - PAN and KYC updated to reflect NRI status - FATCA / residence details current with the record-keeper

Get these in order before you exit. Sorting them after the payout is held up is slower and more painful than doing it up front.