The Finance Ministry has announced that all tax benefits available under the National Pension System (NPS) will also apply to the Unified Pension Scheme (UPS). This decision brings equality between the two schemes and gives a fair chance to employees who choose UPS. The move will make the Unified Pension Scheme more attractive for central government employees.

Launch of Unified Pension Scheme

The Unified Pension Scheme (UPS) was launched earlier this year as a new option under NPS. It is for employees joining the Central Government civil services from April 1, 2025. Existing government employees who are already under NPS can also choose to shift to UPS.
In March 2025, the Pension Fund Regulatory and Development Authority (PFRDA) issued the rules for UPS.

Government Wants Equal Benefits in Both Schemes

With the latest decision, the government has ensured that employees choosing UPS will also get the same tax benefits and incentives that are available under NPS. This includes tax exemption on employee contributions and other tax savings, which makes UPS a more attractive scheme. The Finance Ministry said that including UPS in the tax system is a step to give transparent, flexible, and tax-friendly retirement options to central government employees.

How Much Will Be Contributed Under UPS?

  • Under UPS, the government will contribute 18.5% of the employee’s basic salary and dearness allowance (DA).
  • The employee will contribute 10%.
  • The aim of this scheme is to give a more fixed and secure pension compared to NPS.

Current Tax Benefits in NPS

Employees get tax exemption up to 10% of their salary (basic + DA) under Section 80CCD(1), within the total ₹1.5 lakh limit under Section 80CCE.

An extra ₹50,000 tax exemption is available under Section 80CCD(1B).

Under Section 80CCD(2), the employer’s contribution (up to 10% of salary) is also tax-exempt.

If the Central Government contributes, then up to 14% tax exemption is allowed even after the ₹1.5 lakh limit under 80CCE.

Tax Benefits on Withdrawal from NPS

You can withdraw up to 25% of your own contribution without paying tax.

Tax exemption is also available on the amount used to buy an annuity after retirement.

However, income from annuity is taxable.

Under Section 10(12A) of the Income Tax Act, when you retire at age 60, 60% of the total pension amount withdrawn as a lump sum is tax-free.

23 Lakh Employees Can Choose UPS

  • About 23 lakh Central Government employees can choose the UPS option.
  • Employees who joined service after January 1, 2004 are allowed to shift to UPS once in their career, instead of continuing with NPS.
  • In the Old Pension Scheme (OPS), employees used to get 50% of their last drawn basic salary as pension.