Budget 2026-27: PFRDA Seeks Tax Parity for NPS Pension Payout Options
PFRDA has urged the government to grant tax-neutral status to new NPS payout options like Systematic Withdrawal Plans (SWPs).
The Pension Fund Regulatory and Development Authority (PFRDA) has moved beyond traditional annuities by expanding retirement payout options and has urged the government to extend tax-free treatment to these new products as well.
The regulator’s proposal aims to ensure that investors are not penalized for choosing options that better suit their financial needs and risk profiles.
Under the current income tax rules, 60% of the amount withdrawn from the National Pension System (NPS) at retirement is tax-free. In addition, under Section 80CCD(5), the remaining 40% of the corpus—which must be mandatorily used to purchase an annuity—gets a tax exemption at the time of investment.
When a person exits the NPS at the age of 60, at least 40% of the accumulated corpus in the government sector and 20% in the non-government sector must be used to buy an annuity from a PFRDA-approved insurer. This entire amount is tax-exempt at the time of purchase.
Moving beyond annuities
However, feedback from subscribers suggests a growing reluctance to invest in annuities, mainly due to low returns and limited flexibility. In response, the PFRDA has proposed additional pension payout products alongside annuities, including Systematic Withdrawal Plans (SWP) and unit redemptions.
PFRDA Chairman Sivasubramanian Raman told FE, “So far, annuities have dominated. But evidence shows that systematic withdrawals and other payout structures within NPS can deliver better returns over the long term. We are working towards offering multiple payout options so that retirees get flexibility based on their risk appetite and life expectancy.”
Closing the tax gap
“We want tax parity across all pension payout products. The tax treatment currently given to annuities under Section 80CCD(5) should be extended to other forms of pension withdrawals as well. The goal is simple: to provide choices without any tax disadvantage,” he said, confirming that the regulator has made a formal representation to the government ahead of the budget.
Even before these proposals, recent changes to exit rules have already allowed private-sector subscribers to reduce the mandatory annuity portion to 20%, enabling withdrawals of up to 80% of the corpus, which is taxable. If tax parity is extended to SWPs, retirees could structure their payouts—such as 20% in annuities and 20% through SWPs—without any tax liability, significantly improving flexibility and overall retirement outcomes.
About the Author
