The Finance Ministry announced today, July 4, 2025, that the Unified Pension Scheme (UPS) will now enjoy the exact same tax benefits as the National Pension System (NPS). This move ensures fairness and provides significant tax relief and incentives for those choosing the UPS.
Understanding the Tax Perks
The decision means employees opting for UPS can take advantage of some excellent tax-saving opportunities:
- Employer’s Contribution is Fully Deductible (Section 80CCD(2)): Your employer’s contribution, up to 10% of your salary, is completely tax-deductible. There’s no monetary limit on this benefit, and it’s over and above the Rs 1.5 lakh limit under Section 80C and the Rs 50,000 under Section 80CCD(1B).
- Tax-Free Withdrawal at Retirement (60 years): When you retire, 60% of your total pension corpus is tax-free! The remaining 40% needs to be used to buy an annuity, and the pension you receive from that annuity will be taxed according to your income slab.
- Tax-Free Partial Withdrawals (Before Retirement): If you need funds for specific reasons like medical treatment or higher education, you can withdraw up to 25% of your own contributions tax-free, subject to certain conditions.
What is the Unified Pension Scheme (UPS)?
The UPS, which officially began on April 1, 2025, and was notified by the government on January 24, 2025, is an option under the existing National Pension System (NPS). It was introduced to meet a long-standing demand from central government employees for an assured pension income, similar to the Old Pension Scheme (OPS), unlike the variable returns of the NPS.
The Union Cabinet approved the UPS in August 2024, promising an assured pension post-retirement. Central government employees have until September 30, 2025, to choose this scheme.
The Five Pillars of UPS
The Unified Pension Scheme is built on a foundation of five key benefits:
- Assured Pension: If you have a minimum of 25 years of qualifying service, you’ll receive a fixed pension of 50% of your average basic pay over the last 12 months before retirement. For shorter service periods (down to a minimum of 10 years), the pension will be proportionate.
- Assured Family Pension: In the unfortunate event of the retiree’s passing, the family will immediately receive an assured family pension, which is 60% of the pension the employee was receiving.
- Assured Minimum Pension: Even with a minimum of 10 years of service, the UPS guarantees an assured minimum pension of Rs 10,000 per month upon superannuation.
- Inflation Indexation: A crucial benefit is the provision for indexation, meaning your assured pension, family pension, and minimum pension will be adjusted for inflation.
- Gratuity: You’ll receive a lump-sum payment at superannuation in addition to gratuity. This payment will be 1/10th of your monthly emoluments (pay + dearness allowance) for every completed six months of service and won’t reduce your assured pension.
Additionally, Union Minister Jitendra Singh confirmed last month that all central government employees under UPS will also be eligible for retirement and death gratuity benefits as per the Central Civil Services (Payment of Gratuity under National Pension System) Rules, 2021.
The government’s contribution under UPS will be 18.5% of basic salary and dearness allowance (up from 14% under NPS), while the employee’s contribution remains 10%.
This is a significant development, offering central government employees a more secure and predictable retirement with substantial tax advantages.