NPS retirement exit explained: Corpus rules, SLW vs SUR and tax treatment

Withdrawal rules change with corpus size and they work differently in volatile markets

Retirement under the National Pension System (NPS) involves more than just amassing a corpus. The challenge lies in the exit strategy: Balancing withdrawals, mandatory annuitisation, and tax implications. With rules dictated by corpus size, a single misstep can jeopardise a retiree's lifelong cash flow.

 

How corpus size changes your options

 

Corpus up to Rs 8 lakh

 

If the corpus is of Rs 8 lakh or less, full withdrawal is allowed. “In this slab, regulations do not permit Systematic Lump Sum Withdrawal (SLW/SUR). As the pension from a small annuity would be very low, many may prefer withdrawing 100 per cent as lump sum to retain flexibility,” said Niyati Shah, vertical head for personal tax at 1 Finance.

 

For example, a government retiree with Rs 7.5 lakh may withdraw the entire amount for medical needs or keep it as an emergency buffer. Alternatively, up to 60 per cent (Rs 4.5 lakh) can be taken as lump sum and the rest used to buy an annuity.

 

Corpus between Rs 8–12 lakh

 

 

A private-sector retiree with Rs 10 lakh corpus may withdraw Rs 3 lakh as lump sum and put Rs 7 lakh into SUR for at least six years to smooth cash flows, Shah said. An annuity may suit households needing predictable “salary-like” income.

 

Corpus above Rs 12 lakh

 

For instance, a government retiree with Rs 25 lakh can withdraw up to 60 per cent (Rs 15 lakh) as lump sum, while at least 40 per cent (Rs 10 lakh) must go into annuity. The lump sum can clear high-cost debt. “It is advisable to consider inflation-adjusted annuity options, where available,” Shah adds.

 

SLW vs SUR

 

In weak markets, the difference becomes stark. “Sequence-of-returns risk is brutal,” Shah said. A fixed SLW forces redemption of more units when NAVs fall. SUR, which redeems fixed units or percentage, automatically lowers withdrawal in bad years.

 

In an illustration assuming a Rs 10 lakh start, early negative returns and ~6 per cent annual withdrawal, the corpus after 10 years falls to about Rs 6.40 lakh under SLW but remains around Rs 8.05 lakh under SUR. “Same market, very different outcome,” she says.

 

Tax traps retirees overlook

 

A key misconception is that higher withdrawals are completely tax free. Under Section 10(12A), only 60 per cent lump sum is exempt. “If a Rs 10 lakh corpus sees Rs 8 lakh withdrawn, Rs 6 lakh is exempt but Rs 2 lakh becomes taxable at slab rates,” Shah explained. Annuity purchase is exempt, but annuity income is taxable as pension.

 

Timing also matters. Withdrawing taxable portions in a year with rental or consulting income can push retirees into higher slabs. Staggering withdrawals through SLW or SUR may reduce this shock.

 

Matching strategy to cash-flow reality

 

Shah noted that retirees with fixed EMIs or medical costs often regret SUR due to income variability. Conversely, those choosing SLW in falling markets may see faster corpus erosion. “A better structure could be SUR with a 12–18-month cash bucket and partial annuity for essential expenses,” she suggests.

 

The optimal path depends on income certainty needs, risk appetite and tax positioning — not just the size of the retirement corpus.