Did NPS subscriber get tax deduction on additional 20% contribution (from 60% to 80%)?

Finance Minister Nirmala Sitharaman in her Budget 2026 speech today (Sunday, February 1, 2026) did not increase the tax-free National Pension System (NPS) lump sum withdrawal limit for non-government subscribers from 60% to 80%. After Pension Fund Regulatory and Development Authority (PFRDA) increased the NPS lump sum withdrawal limit for non-government subscribers from 60% to 80% in December 2025, a lot of NPS subscribers were expecting the government to increase the tax-free lump sum withdrawal limit to 80%, but the Finance Minister made no such announcement today.

Now, NPS subscribers have to wait whether the Income Tax Department comes up with a circular to increase the tax-free lump sum withdrawal limit from 60% to 80% for non-government subscribers.

Pratik Vaidya Managing Director and Chief Vision Officer, Karma Management Global Consulting Solutions Pvt Ltd, says, “If the current structure continues and 20% of the NPS corpus remains taxable at exit, the tax impact can still be relatively moderate for retirees with no other income. For instance, on a retirement corpus of Rs 2.5 crore, 20% or Rs 50 lakh would be treated as taxable income.”


Vaidya further says, “Assuming the subscriber has no other income in that year, the tax liability would be calculated as per applicable income tax slabs after the basic exemption.”

Let’s see how an increased tax-free NPS withdrawal limit to 80% would have helped a non-government NPS subscriber.

First, go through NPS corpus withdrawal conditions for non-government subscribers-

Non-government sector — Utilisation of Accumulated Pension Wealth (APW) or lump sum

Exit scenario / event	APW/lump sum at time of exit (₹)	Lump sum utilisation	Systematic unit redemption (min 6 years)	Annuity
Superannuation / ≥15 years / age 60 / incapacitation	≤ 8 lakh	100%	Not applicable	Not applicable
Superannuation / ≥15 years / age 60 / incapacitation	≤ 8 lakh	Up to 80%	Not applicable	At least 20%
Superannuation / ≥15 years / age 60 / incapacitation	> 8 lakh and ≤ 12 lakh	Up to ₹6 lakh	Balance of APW after lump sum	Not applicable
Superannuation / ≥15 years / age 60 / incapacitation	> 8 lakh and ≤ 12 lakh	Up to 80%	Not applicable	At least 20%
Superannuation / ≥15 years / age 60 / incapacitation	> 12 lakh	Up to 80%	Not applicable	At least 20%
Voluntary exit	≤ 5 lakh	100%	Not applicable	Not applicable
Voluntary exit	≤ 5 lakh	Up to 20%	Not applicable	At least 80%
Voluntary exit	> 5 lakh	Up to 20%	Not applicable	At least 80%
Death	Any APW	Up to 100%	Not applicable	Up to 100%
Joined on or after 60 years – exit	≤ 12 lakh	100%	Not applicable	Not applicable
Joined on or after 60 years – exit	≤ 12 lakh	Up to 80%	Not applicable	At least 20%
Joined on or after 60 years – exit	> 12 lakh	Up to 80%	Not applicable	At least 20%
Joined on or after 60 years – death	Any APW	Up to 100%	Not applicable	Up to 100%

Source: PFRDA website

How could an increased NPS withdrawal limit reduce a non-government NPS subscriber’s tax outgo?

Sneha Pai, Senior Director Direct Tax, Nexdigm, illustrates an example of the estimated tax advantage to a non-government subscriber had the government increased the tax-free lump sum withdrawal limit to 80% -

Suppose the NPS Corpus amount is Rs 20 lakh

Particulars	Current Rule (60%)	Amended rule (80%- tax free)	Amended rule (80%- not tax free) current scenario before income tax amendment
Total Amount	Rs 20,00,000	Rs 20,00,000	Rs 20,00,000
Lump sum withdrawal on retirement	Rs 12,00,000 (60%)	Rs 16,00,000 (80%)	Rs 16,00,000 (80%)
Tax Free Portion	Rs 12,00,000	Rs 16,00,000	Rs 12,00,000
Amount used for Annuity	Rs 8,00,000	Rs 4,00,000	Rs 4,00,000 (20,00,000-16,00,000)
Taxable Portion on lumpsum	0	0	Rs 4,00,000(16,00,000-12,00,000)
Tax on lumpsum	0	0	Rs 1,24,800 (Assuming in 30% bracket +4% cess)
Immediate Cash in hand	Rs 12,00,000	Rs 16,00,000	Rs 14,75,200 (Rs 16,00,000- Rs 1,24,800)
Net gain		Rs 4,00,000 (Rs 16,00,000- Rs 12,00,000)	Rs 2,75,200 (Rs 14,75,200- Rs 12,00,000)

Vaidya describes tax advantage to a non-government NPS subscriber through an example where the NPS corpus at retirement for a non-government subscriber is Rs 10 lakh. Here are Vaidya’s calculations-

Assumptions for tax on NPS retirement corpus-

Corpus at retirement: Rs 10,00,000

Marginal tax rate for the retiree in the year of withdrawal: 30% (plus 4% cess). Effective tax on the taxable amount = 30% × 1.04 = 31.2%.

Scenario A — Earlier rule (60% tax-free)

Tax-free lump sum = 60% of Rs 10,00,000 = Rs 6,00,000.

Amount left for annuity purchase = 40% of Rs 10,00,000 = Rs 4,00,000.

Net immediate tax on withdrawal at retirement = Rs 0 (for the lump sum portion) because 60% is exempt. Future annuity income will be taxed when received.

Scenario C — 80% allowed (assumption) and Income-tax law amended to make 80% tax-exempt (assumption)

Tax-free lump sum = 80% of Rs 10,00,000 = Rs 8,00,000.

No tax at withdrawal on that 80% portion. The remaining 20% (Rs 2,00,000) used for annuity purchase will generate pension that is taxable when received. Net immediate tax = Rs 0 on lump sum.