Budget 2026-27: SBI Research flags pension revamp, wider UPS and NPS push with tax incentive

As the Union Budget 2026-27 approaches, SBI Research has laid out a set of recommendations aimed at strengthening India’s pension ecosystem, expanding coverage and improving retirement security for a larger share of the workforce. The proposals come against the backdrop of low pension penetration and uneven adoption of existing retirement schemes, even as demographic shifts make long-term pension adequacy an increasingly urgent policy concern.

UPS

In its Prelude to Union Budget 2026-27 report, SBI Research highlighted the limited uptake of the Unified Pension Scheme (UPS), which was launched on April 1, 2025, for central government employees. Of an estimated 24 lakh eligible employees, only about 1.2 lakh have enrolled so far. To address this, the report recommends expanding the UPS to include state government and public sector undertaking employees, which could significantly widen the scheme’s reach and strengthen formal pension coverage.

NPS Vatsalya scheme

The report also flagged slow adoption of the NPS Vatsalya scheme, introduced in September 2024 to encourage early pension savings. With subscriber numbers at around 1.3 lakh as of August 2025, SBI Research suggested enhancing tax incentives to improve participation. It recommended increasing deduction limits under Section 80CCD(1B), arguing that stronger tax benefits would encourage families to start pension planning earlier and build long-term retirement buffers.

Another major proposal focuses on revamping the Employees’ Provident Fund Organisation (EPFO). SBI Research called for aligning EPFO more closely with the National Pension System (NPS) framework, particularly in terms of technology, governance and transparency. The report noted that modernising EPFO operations and improving service delivery would enhance member confidence and efficiency, while bringing greater consistency across retirement savings platforms.

Uniform tax treatment

SBI Research also underscored the need for uniform tax treatment across retirement and insurance products, including annuities and unit-linked insurance plans (ULIPs). According to the report, differences in taxation often distort retirement planning decisions, pushing savers toward products based on tax advantages rather than suitability. Rationalising tax treatment across these instruments could create a more level playing field and support informed retirement choices.

To deepen pension penetration in the private sector, the report proposed mandating National Pension System contributions for large private-sector employers. SBI Research suggested applying such a requirement to firms above a defined size threshold, such as those employing more than 100 or 200 workers. This, it argued, would extend structured retirement savings to a much broader segment of the workforce that currently lacks formal pension coverage.

The report also highlighted the importance of interoperability between EPFO and NPS. Enabling seamless portability across pension systems would benefit employees who move between jobs, sectors or employment types, ensuring continuity in retirement savings and reducing administrative hurdles.

Overall, SBI Research said its recommendations are aimed at building a more inclusive, efficient and resilient pension framework. With India’s workforce still largely outside formal retirement systems, the report argued that policy action in Budget 2026-27 could play a critical role in expanding pension coverage and securing long-term financial stability for future retirees.

UPS vs NPS

The Unified Pension Scheme (UPS), effective from April 1, 2025, has been introduced to provide Central government employees with a guaranteed, inflation-indexed and government-backed pension, offering certainty and protection from market volatility. In contrast, the National Pension System (NPS) is a market-linked, contribution-based retirement scheme where returns depend on investment performance, offering the possibility of higher long-term gains but without assured payouts.

A key distinction between the two lies in pension certainty. Under UPS, employees with 25 years or more of service are entitled to a pension equal to 50 per cent of the average salary drawn over the last 12 months of service. NPS, on the other hand, does not offer any guaranteed pension amount, as retirement benefits depend entirely on market returns and annuity rates at the time of exit.

Inflation protection is another differentiator. UPS provides Dearness Relief on pensions, ensuring that payouts keep pace with rising living costs. NPS does not offer any automatic inflation adjustment, leaving retirees exposed to erosion in real income over time.

Contribution structures also vary. Under NPS, employees contribute 10 per cent of salary, matched by a 14 per cent contribution from the government. In UPS, while the employee contribution remains at 10 per cent, the government’s contribution is higher at 18.5 per cent.

UPS also offers stronger family protection, providing 60 per cent of the pension to the spouse in the event of the employee’s death, along with a lump-sum payment linked to service tenure.

For government employees seeking stable and predictable retirement income, UPS is better suited. NPS is more appropriate for private-sector employees, the self-employed, or those willing to accept market risk for potentially higher returns.