Govt extends NPS tax benefits to new Unified Pension Scheme for central govt employees

In a significant boost for retirement planning, the government has announced that all tax benefits currently available under the National Pension System (NPS) will apply mutatis mutandis to the newly introduced Unified Pension Scheme (UPS).

The Department of Financial Services, Ministry of Finance, through its notification dated 24 January 2025, had earlier introduced the UPS as an option under the NPS framework for new recruits to the Central Government civil service, effective from 1 April 2025. This provides existing Central Government employees covered under NPS a one-time chance to switch to the UPS.

To operationalise this framework, the Pension Fund Regulatory and Development Authority (PFRDA) issued the PFRDA (Operationalisation of the Unified Pension Scheme under NPS) Regulations, 2025 on 19 March 2025.

By extending NPS tax benefits to UPS, the government ensures parity between the two schemes, offering significant tax relief and incentives for employees considering a transition. Officials highlight that integrating UPS into the tax structure reflects the government’s broader commitment to pension reforms aimed at delivering transparent, flexible, and tax-efficient retirement solutions for Central Government employees.

Operational since 1 April 2025, the UPS was launched as an alternative to the NPS, addressing persistent concerns among employees. A key criticism of NPS has been its shift away from the earlier ‘defined benefit’ system, which guaranteed a predictable monthly pension. In contrast, NPS offers fixed contributions but market-linked returns, leading to uncertainty in retirement income. NPS also mandates annuity purchases, tying retirees to prevailing annuity rates, which may not always be favorable.

The UPS seeks to resolve these issues by ensuring a guaranteed pension. Employees completing 25 years or more in central government service are eligible for a pension equal to 50% of their average salary during the last 12 months of service. Even those with just 10 years of service are assured a minimum pension of ₹10,000 per month, with proportional payouts for service periods between 10 and 25 years. Crucially, UPS pensions are indexed to inflation through adjustments in dearness relief, safeguarding retirees’ lifestyles—a feature absent in NPS.

Financially, UPS contributions differ as well. Employees contribute 10% of their basic pay plus dearness allowance, matched by the employer. Additionally, the government contributes an extra 8.5% into a separate pooled fund, raising its total contribution to 18.5%, higher than the NPS’s 14%. UPS also provides a one-time lump sum equal to one-tenth of the last drawn basic pay plus DA for every six months of qualifying service, equating to five months’ salary for 25 years of service.

Experts note UPS’s stronger performance relative to NPS in terms of long-term returns. For instance, the lifetime internal rate of return (IRR) for a UPS subscriber starting at age 25 is projected at 9.37%. To match this, NPS would need to deliver a return of 12.24% annually during the accumulation phase. The advantage of UPS grows as the starting age rises, underscoring its appeal for those closer to retirement.