NPS : Tax Liability in Case of Multiple PRANs-The "15-Year Rule" & The 80% Trap

The National Pension System (NPS) has fundamentally changed. With the introduction of the Multiple Scheme Framework (MSF) and the December 2025 PFRDA Exit Rules, the old rigid structure is gone. We now have the ability to hold Multiple PRANs (one per CRA) and exit much earlier than age 60 without the "premature exit" penalty.

However, while PFRDA regulations have become highly flexible, the Income Tax Act has not yet fully aligned with these changes. This creates a specific "Tax Trap" that every investor running multiple PRANs must understand.

Here is the detailed breakdown of the tax liabilities.

1. The Core Principle: Independent Tax Treatment

Under the new "One Person, Multiple PRANs" architecture, each PRAN is treated as a distinct legal entity for tax purposes.

• No Aggregation: The corpus of PRAN 1 (e.g., NSDL) is not clubbed with PRAN 2 (e.g., KFin) for calculating exit limits.
• Independent Exits: You can trigger a "Normal Exit" from PRAN 2 while keeping PRAN 1 active for another 10 years.

2. The New "15-Year Rule" for Normal Exit

Historically, any exit before age 60 was treated as "Premature," mandating an 80% annuity lock-in. This was the biggest drawback of NPS.

The Change (Dec 2025): The PFRDA has redefined "Normal Exit" for the All Citizen Model.

• Rule: If you have completed 15 years of subscription, you can exit the PRAN even if you are not yet 60.
• Status: This is treated as a Maturity/Superannuation Exit, not a Premature Exit.
• Liquidity: You are eligible for the 80% Lump Sum withdrawal option, just like a retiree at age 60.

3. The "Tax Trap": PFRDA 80% vs. IT Dept 60%

This is the most critical section. While PFRDA now allows you to withdraw 80% of your corpus as a lump sum, the Income Tax Act (Section 10(12A)) presently explicitly exempts only 60% of the total corpus.

If you utilize the full 80% withdrawal limit allowed by PFRDA, you will trigger a tax liability on the differential amount.

The Calculation Logic

• Total Corpus: ₹50 Lakhs
• Withdrawal limit (PFRDA): 80% = ₹40 Lakhs
• Tax-Free Limit (IT Act): 60% = ₹30 Lakhs
• Taxable Amount: ₹10 Lakhs (The extra 20%)

Tax Liability Table:

Component	PFRDA Rule	Income Tax Status (FY 2025-26)	Tax Impact
First 60% (Lump Sum)	Allowed	Exempt u/s 10(12A)	₹0 Tax
Next 20% (Lump Sum)	Allowed	Taxable Income	Added to Annual Income (Taxed at Slab Rate)
Last 20% (Annuity)	Mandatory	Exempt at Investment	₹0 Tax (at time of exit)
Annuity Income	Monthly Pension	Taxable Salary	Taxed at Slab Rate in future years

 To ensure a 100% tax-free exit, it is safer to withdraw only 60% as lump sum and put 40% into Annuity, unless the Finance Ministry amends Section 10(12A) in the upcoming Budget 2026.

4. Scenario Analysis: Multiple PRAN Strategy

Let’s apply this to a practical scenario where you have two PRANs.

The Setup:

• PRAN 1 (Core Retirement): Started at age 30, matures at age 60.
• PRAN 2 (Mid-Term Wealth): Started at age 35, matures at age 50 (15-year tenure).

Tax Implications:

PRAN 2 (Exiting at Age 50 after 15 Years)

Since this meets the 15-year criteria, it is a Normal Exit.

1. Lump Sum (60%): You withdraw this completely Tax-Free.
2. Annuity (40%): You purchase an annuity. The capital is safe, but the monthly pension you start receiving immediately (at age 50) will be added to your salary income and taxed.
3. Result: You have successfully created a tax-free liquidity event at age 50 without the 80% lock-in penalty.

PRAN 1 (Exiting at Age 60)

1. Lump Sum (60%): Tax-Free.
2. Annuity (40%): You purchase a second annuity. This pension income is added to your existing pension from PRAN 2.

5. Conclusion & Recommendation

The "Multiple PRANs" feature coupled with the "15-Year Rule" effectively turns NPS into a mid-term investment vehicle (15-year lock-in) rather than just a retirement one.

However, until the Income Tax Act is amended to match the PFRDA’s 80% withdrawal rule, limit your lump sum withdrawal to 60%. Taking the full 80% today creates an unnecessary tax burden on that extra 20%, defeating the purpose of a tax-efficient exit.

Quick Summary

• Multiple PRANs: Taxed independently.
• 15 Years: The new "Maturity" age for secondary PRANs.
• Safety Limit: Withdraw 60% to stay tax-free.
• Risk: Withdrawing 80% attracts tax on the extra 20%.

Disclaimer: This article is only sharing the information which I know through reliable source / seminar. For better understanding and to choose it as one of the investment options, please take advice and consult a financial expert.

 By HRMIT – A HR Professional

You would like to see : National Pension System (NPS): Changes in Rules including Multiple PRANs & 80% Withdrawal rules