The National Pension System (NPS) has long been a favorite for Indians looking to build a secure retirement nest egg while saving on taxes. However, for a long time, investors felt the exit and withdrawal rules were overly rigid.
To make the scheme more investor-friendly, the Pension Fund Regulatory and Development Authority (PFRDA) recently introduced significant amendments to the PFRDA (Exits and Withdrawals under the National Pension System) Regulations.
If you are a first-time investor or someone already contributing to NPS, these changes affect how and when you can access your money. In this guide, we will break down the New NPS Withdrawal Rules in plain language, with examples.
Understanding the New NPS Withdrawal Rules
The National Pension System (NPS) has long been a favorite for Indians looking to build a secure retirement nest egg while saving on taxes. However, for a long time, many felt that the rules were a bit rigid—especially when it came to getting your own money back.
To make the scheme more investor-friendly, the Pension Fund Regulatory and Development Authority (PFRDA) has recently introduced game-changing amendments. These updates, effective as of late 2025 and early 2026, have completely overhauled how you exit and withdraw from your NPS account.
What is NPS, and Why Do the Rules Matter?
Think of NPS as a “Retirement Gullak” (piggy bank). You contribute during your working years, the money grows through investments in stocks and bonds, and when you retire at 60, you use that money to receive a monthly pension.
The PFRDA (the boss of all pension funds in India) periodically updates the rules to ensure that your money is safe and that you have enough flexibility to use it for life’s big milestones. The latest amendments focus on making withdrawals smoother and providing more options for how you receive your pension.
Key Amendment 1: The “Penny Drop” Verification
Ensuring your money reaches the right pocket.
One of the most important updates is the mandatory ‘Penny Drop’ verification.
What does this mean?
In the past, there were instances where withdrawal amounts were credited to the wrong bank accounts due to typos in account numbers or IFSC codes. To prevent this, PFRDA now mandates a “Penny Drop” test before any withdrawal is processed.
How it works:
- The Central Recordkeeping Agency (CRA) drops ₹1 into your bank account.
- They check if the name in the bank records matches the name on your NPS account.
- If it’s a match, the actual withdrawal is approved.
Relatable Example: It’s like when you set up a new UPI app (like GPay or PhonePe), and it sends a tiny transaction to verify your bank link. This ensures your hard-earned retirement money doesn’t end up in a stranger’s account.
Key Amendment 2: Changes in Systematic Lump Sum Withdrawal (SLW)
Your money, your schedule.
Earlier, when you turned 60, you had to take your 60% tax-free portion as a single one-time payment. The new amendment introduces the Systematic Lump Sum Withdrawal (SLW).
The New Flexibility:
Instead of taking all your money at once, you can now choose to receive that 60% lump sum in installments. You can opt to receive it:
- Monthly
- Quarterly
- Half-yearly
- Annually
This can continue until you reach the age of 75.
Why is this good?
Imagine you retire and receive ₹50 lakhs in a lump sum. You might be concerned about how to invest it or worry about spending it too quickly. With SLW, it’s like receiving a “bonus salary” every month alongside your regular pension, helping you manage your cash flow better.
Key Amendment 3: Phased Withdrawal and Annuity Deferment
Waiting can be rewarding.
The new regulations allow for better “deferment” options. If you don’t need the money immediately at age 60, you can choose to defer (postpone) your withdrawal.
- Annuity Deferment: You can postpone buying your pension plan (annuity) until age 75.
- Lump-sum deferral: You can also defer your cash payout until age 75.
The Benefit: Since your money remains invested in the NPS for longer, it has the potential to grow even more through compounding. If the stock market is down when you turn 60, you can wait for a few years for the market to recover before pulling your money out.
Key Amendment 4: New Rules for Premature Exit
What if you want to quit early?
Life is unpredictable. Sometimes, you might want to close your NPS account before you turn 60. This is called a “Premature Exit.”
The Updated Rule:
- The 5-Year Rule: You can now only opt for a premature exit if you have been in the NPS for at least 5 years.
- The 80/20 Rule: In a premature exit, you can only take 20% of the money as cash. The remaining 80% must be used to purchase an annuity (a monthly pension).
- Small Corpus Exception: If your total balance is less than ₹2.5 Lakhs, you can withdraw the entire amount as a lump sum without buying a pension plan.
Key Amendment 5: Partial Withdrawals for Specific Needs
Help for life’s big moments.
NPS is for retirement, but PFRDA understands you may need funds for your children’s weddings or a medical emergency.
Conditions for Partial Withdrawal:
- Purpose: Can be used for higher education of children, marriage, purchase/construction of a residential house, or treatment of specified critical illnesses.
- Limit: You can withdraw up to 25% of your own contributions (not the interest or the employer’s contribution).
- Frequency: You can do this only 3 times during your NPS account tenure.
Note: The new amendment clarifies that for a house purchase, you can only withdraw if it’s your first house.
Summary of Exit Options at Age 60
| Feature | Old Rule | New Rule (Amended) |
| Lump Sum Payout | One-time payment | Choice of One-time or SLW (Monthly/Quarterly) |
| Max Age to Stay | Up to 70-75 | Stay invested and defer until 75 |
| Full Withdrawal Limit | If corpus < ₹5 Lakhs | If corpus < ₹5 Lakhs (remains the same) |
| Verification | Manual/Document-based | Mandatory ‘Penny Drop’ Verification |
How to Apply for Withdrawal Under New Rules?
Thanks to the digital push by PFRDA, the process is now almost entirely paperless:
- Login: Access your CRA (NSDL or Kfintech) portal using your PRAN and password.
- Request: Select ‘Exit/Withdrawal’ and choose the type (Partial, Premature, or Normal Exit).
- E-Sign: Verify your identity using Aadhaar-based OTP (e-Sign).
- Verification: The ‘Penny Drop’ will automatically verify your bank details.
- Approval: Once verified, the funds are credited to your bank account or sent to the Annuity Service Provider.
Final Words
The amendments to the PFRDA Exit and Withdrawal Regulations are a huge win for Indian investors. By introducing Systematic Lump Sum Withdrawals and Penny Drop verification, the PFRDA has made NPS not just a tax-saving tool, but a flexible, secure, and modern retirement solution.
For a first-time investor, the message is clear: NPS is no longer a “locked-in” trap. It is a sophisticated investment vehicle that allows you to grow your wealth while providing sufficient safeguards to access your money when you genuinely need it.
FAQs (Frequently Asked Questions)
1. Can I change my bank account details at the time of withdrawal?
Yes, but the new bank account will undergo the ‘Penny Drop’ verification to ensure it belongs to you.
2. Is the 60% lump sum withdrawal taxable?
No. As per current Income Tax laws, the 60% lump sum you withdraw at age 60 is entirely tax-free.
3. What happens if the ‘Penny Drop’ verification fails?
If it fails, the CRA will notify you. You may need to upload a cancelled cheque or a copy of your bank passbook to verify the details manually.
4. Can I use SLW for my Tier-II account?
The SLW feature is primarily designed for the Tier-I (Retirement) account to manage post-retirement income. Tier-II accounts already allow flexible withdrawals.
5. Is the 5-year limit for premature exit applicable to everyone?
Yes, the 5-year minimum subscription period is now a standard requirement for anyone looking to close their account before age 60.
Recommended Readings
To further your understanding of NPS and retirement planning in India, here are seven authoritative resources:
- PFRDA Official Website – FAQs on NPS https://www.pfrda.org.in/web/pfrda/faqs
- NPS Trust – All About NPS https://www.npstrust.org.in/content/all-about-nps
- ClearTax – Guide to National Pension Scheme https://cleartax.in/s/nps-national-pension-scheme
- Economic Times – Wealth Section (Retirement Planning) https://economictimes.indiatimes.com/wealth/plan
- Book: “Retire Rich” by P.V. Subramanyam (Available on Amazon/Flipkart)
- Value Research Online – NPS Tracker & Analysis https://www.valueresearchonline.com/nps/
- The Psychology of Money by Morgan Housel (Book – highly recommended for understanding long-term wealth behavior).
Disclaimer
The information provided in this blog is for educational and informational purposes only. Please consult a qualified financial advisor before making investment decisions.
VSJ FinMart is an AMFI-registered Mutual Fund Distributor (MFD) and does not offer investment advisory services. Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.