The Finance Ministry has announced that the Unified Pension Scheme (UPS) will now get all the tax benefits available under the National Pension System (NPS). This step will make UPS more attractive for central government employees.
Launch of Unified Pension Scheme (UPS)
The Unified Pension Scheme (UPS) was launched earlier this year as a new option under NPS. It is available for employees joining Central Government civil services from April 1, 2025. Existing government employees who are already under the National Pension System (NPS) can also choose to shift to UPS. In March 2025, the Pension Fund Regulatory and Development Authority (PFRDA) issued the rules related to this scheme.
Government’s Goal: Equal Benefits for UPS and NPS
With the latest decision, the government has made sure that employees choosing UPS will get the same tax benefits and incentives as those available under NPS. This includes tax exemption on employee contributions and other tax-related benefits. The goal is to provide a fair and level field for both schemes. According to the Finance Ministry, including UPS in the tax structure is a step toward giving transparent, flexible, and tax-friendly retirement options for central government employees.
Contribution Rules Under UPS
Under the Unified Pension Scheme:
- The government will contribute 18.5% of the employee’s basic salary and dearness allowance.
- The employee will contribute 10% of the basic salary and dearness allowance.
- UPS is introduced to offer a more fixed and secure pension compared to the NPS.
Tax Benefits Available in NPS
Here are the current tax benefits under NPS that will now also apply to UPS:
- Section 80CCD(1): Employee’s contribution up to 10% of salary (basic + DA) is tax-free, included in the ₹1.5 lakh overall limit under Section 80CCE.
- Section 80CCD(1B): Extra tax exemption of up to ₹50,000 is available.
- Section 80CCD(2): Employer’s contribution up to 10% of salary (basic + DA) is tax-free. If the central government contributes, up to 14% is tax-free beyond the ₹1.5 lakh limit.
Tax Benefits on NPS Withdrawals
- Partial withdrawal: Up to 25% of the employee’s own contribution is tax-free.
- Annuity purchase after retirement: Tax-free at the time of purchase, but income from annuity is taxable.
- Section 10(12A): Lump sum withdrawal of up to 60% of total pension at the time of retirement (after age 60) is tax-free.
23 Lakh Employees Can Choose UPS
Nearly 23 lakh central government employees can choose the UPS option. Employees who joined service after January 1, 2004 can switch to UPS once in their career instead of staying with NPS.
Earlier, in the Old Pension Scheme (OPS), employees used to receive 50% of their last basic salary as pension. The new UPS aims to offer a similar level of security along with modern tax benefits.