The Unified Pension Scheme (UPS), marks a major step towards securing the financial future of 23 Lakhs central government employees after retirement. This new scheme aims to streamline and improve pension benefits, offering a stronger safety net for retirees and their families. Let’s explore the key features of the Unified Pension Scheme and its implications for future pensioners.
Unified Pension Scheme to Launch in 2025
Cabinet Secretary-designate T.V. Somanathan has confirmed that the new pension scheme will take effect on April 1, 2025. This scheme will apply to employees retiring by March 31, 2025, and will include the payment of any outstanding arrears. Starting from the next financial year, employees will have the option to choose between the Unified Pension Scheme (UPS) and the National Pension System (NPS).
What is NPS?
The National Pension Scheme (NPS) was first introduced in January 2004, initially targeting only government employees. In 2009, its scope was broadened to include individuals across all employment sectors. The NPS, overseen by the Pension Fund Regulatory and Development Authority (PFRDA) and the government, is a voluntary, long-term investment scheme designed to provide financial security in retirement.
The NPS is designed to offer both a pension and the potential for significant investment returns. Upon retirement, participants can access a portion of their accumulated savings, while the rest is converted into a steady monthly income to ensure financial stability in retirement.
The scheme includes two account types: Tier 1 and Tier 2. Tier 1 accounts are intended for long-term savings with restricted withdrawals until retirement, whereas Tier 2 accounts offer more flexibility, allowing withdrawals before retirement.
Upon reaching retirement age, individuals can withdraw up to 60% of their accumulated NPS funds tax-free. The remaining 40% is generally used to purchase an annuity, which provides a pension, typically around 35% of the individual’s final salary.
Under Section 80 CCD of the Income Tax Act, contributors to the NPS are eligible for tax deductions up to Rs 1.5 lakh.
The option to withdraw 60% of the NPS corpus tax-free at retirement makes it an appealing choice for retirement planning, offering both a substantial lump sum and a regular pension.
Unified Pension Scheme (UPS) vs. National Pension Scheme (NPS)
UPS vs. NPS:
- UPS (Unified Pension Scheme): Promises an assured pension. Those enrolled in NPS can switch to UPS in the following year.
- NPS (National Pension Scheme): A market-linked defined contribution scheme. Pension amounts vary based on market performance.
Contribution Details:
- NPS: Employees contribute 10% of their basic salary, with the government matching 14%.
- UPS: Government contribution is 18.5%, while employees continue contributing 10% of their basic pay and dearness allowance (DA).
Tax Benefits:
- NPS: Employees are eligible for tax deductions up to 10% of their salary (Basic + DA) under Section 80 CCD(1), within the overall limit of ₹1.5 lakh under Section 80 CCE. An additional deduction of up to ₹50,000 is available under Section 80 CCD(1B), beyond the ₹1.5 lakh ceiling.
- UPS: Tax benefits are yet to be announced.
Eligibility:
- UPS: Available only to government employees who have opted for NPS.
- NPS: Open to private employees if their employer participates, or any Indian citizen between the ages of 18 and 70 can voluntarily enroll.
Old Pension Scheme (OPS) Vs New Unified Pension Scheme (UPS)
Old Pension Scheme (OPS):
- Pension Benefit: Offered a defined benefit pension of 50% of the last drawn salary, fully funded by the government without requiring employee contributions.
- Financial Burden: The OPS placed a significant financial burden on the government due to its non-contributory nature.
- Minimum Pension: Generally provided 50% of the last drawn salary, often exceeding ₹10,000, but did not specify a minimum pension amount.
- Family Pension: Provided family pension benefits, typically at a lower percentage compared to the UPS.
- Inflation Adjustment: Included dearness relief for inflation adjustments, but was less standardized compared to the UPS.
Unified Pension Scheme (UPS) (Effective April 1, 2025):
- Pension Benefit: Incorporates elements of the OPS with a contributory model where employees contribute 10% of their salary, and the government contributes 18.5%. Guarantees a pension based on 50% of the average basic pay over the last 12 months before retirement.
- Contributory Model: Shifts the financial responsibility from a government-funded system to a shared contributory model.
- Minimum Pension: Guarantees a minimum pension of ₹10,000 per month for employees with at least 10 years of service.
- Family Pension: Sets family pension benefits at 60% of the employee’s pension upon their demise, which is more generous than the OPS.
- Inflation Indexation: Includes inflation indexation based on the All India Consumer Price Index for Industrial Workers (AICPI-IW), ensuring pensions adjust for inflation.
Source: PMIndia.gov.in
