Centre aligns UPS tax perks with NPS to offer parity and relief

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The Central Government has aligned tax benefits for the Unified Pension Scheme (UPS) with the National Pension System (NPS), offering parity and relief to employees.
Centre aligns UPS tax perks with NPS to offer parity and relief
 Credits: Sanjay Rawat

On July 4, the Central Government, to ensure parity with the existing National Pension System (NPS) and provide substantial tax relief, extended NPS tax benefits even for those employees who opted/going to opt for Unified Pension Scheme (UPS), mutatis mutandis. Means, whatever tax benefits NPS subscribers are enjoying so far will be available to the new pension class under old as well as new tax regimes. 

What is OPS?

Before the introduction of NPS, all Central and State Government employees were covered under the Old Pension Scheme (OPS). The OPS ensured a guaranteed pension based on an employee’s last basic salary and years of service rendered, along with a biannual revision of dearness allowance to adjust to inflation. However, as a precondition, at least ten years of service were mandated for availing the pension benefits. Salient features were – unlike NPS, no employee contribution was required to be made, guaranteed pension based on the last salary drawn, regular revision of dearness allowance, and extended survival benefits for spouses. However, no such lump sum payment at the time of retirement. The OPS places a heavy financial burden and ever-increasing pension liabilities on the exchequer.

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OPS Tax Benefits

No tax benefits such as Section 80C, and 80CCD (1b) available.

What is NPS?

The Central Government has introduced NPS to provide old age income and reasonable market-based returns over a period from January 1, 2004, to its employees. Subsequently, it was made available to all Indian citizens from May 1, 2009. That way, it has extended old age security coverage to all citizens. NPS can be classified broadly into the Government Sector – Central and State, and Non-Government - corporate and all Indian citizens. Its salient features are – low cost product, tax benefits for contributing individuals, employers and employees, attractive market-linked returns, well-managed by dedicated pension funds and regulated by the Pension Fund Regulatory and Development Authority. 

NPS Tax Benefits

Old Tax Regime - Under NPS, there are two different accounts – NPS Tier 1 and NPS Tier 2. An NPS Tier 1 is a primary and NPS Tier 2 is voluntary and an add-on account. It is appropriate to note that NPS tier 1 contributions alone are eligible for tax deductions.

A subscriber for his self-contributions can claim up to Rs. 1,50,000 as tax deductions under Section 80CCD (1) of the Income Tax Act, 1961. In addition, he can also claim up to Rs. 50,000 for self-contributions under Section 80CCD (1B) of the said Act. Further NPS contributions count towards the overall limit of Rs. 1,50,000 provided under Section 80C of the said Act.

Employers Contribution - A government employee can claim up to 14 per cent of basic salary and dearness allowance, and a non-government salaried employee up to 10 per cent of basic salary and dearness allowance as deduction under Section 80CCD (2).

A partial withdrawal allowed after three years of investment is fully exempted from tax.  

A subscriber, upon attaining 60 years, can withdraw 60 per cent of the total corpus as a lump sum, which is tax-free. Remaining 40 per cent should be utilised to buy annuities. The annuity income is taxable as per income tax slab rates.   

New Tax Regime – The Central  Government, in its attempt to move to a tax-exemption-free regime, denied any such tax deductions under Sections 80C/80CCD(1B). In other words, the aforesaid deduction of Rs. 1,50,000/- and additional deduction of Rs. 50,000/- cannot be availed if a subscriber opts new income tax regime. Partial and lump sum withdrawals up to 25 per cent and 60 per cent will be tax-free, respectively. Further, for his/her employer’s contributions up to 14 per cent of basic salary and dearness allowance can be availed as deduction under Section 80CCD (2). Lump sum withdrawal on closure of account up to 60 per cent will be tax-free.  

What is UPS?

The Central Government brought a new UPS regime as an option under NPS, combining the best features of both OPS and NPS for its employees with effect from April 1, 2025. The UPS to provide fixed and assured pension of 50 per cent of the last drawn salary upon superannuation for all employees subject to completion of 25 years of service. Other employees with minimum ten years of service will get assured pension of Rs. 10,000/-, It ensures inflation-linked adjustments, pension for employees on turning 60 years. In addition, 60 per cent of the last pension is drawn to the spouse after the pensioner's death. 

UPS Tax benefits 

As said earlier, to ensure parity with the existing NPS and provide substantial tax relief, the Central Government has extended the aforesaid NPS tax benefits even for those employees opted for / will opt Unified Pension Scheme (UPS), mutatis mutandis. Means, whatever tax benefits NPS subscribers are enjoying so far will be available to the new pension class under old as well as new tax regimes.  As per FAQs on UPS, the Central Government in addition to 10 per cent of basic salary and dearness allowance, will contribute additional 8.5 per cent and make it total 18.5 per cent as its share. Since the maximum deduction under Section 80CCD(2) is 14 per cent, a clarification is required that whether maximum deduction allowed is only up to 14 per cent or 18.50 per cent.   

To Sum Up

As part of checking ground reality, reached out to some central government employees working in the Income Tax, GST, Customs, Registrar of Companies, and Railways departments. Findings revealed that many respondents in their thirties and up to their fifties are willing to continue under NPS only, though tax reliefs are extended. Those who are left with the number of years of service, have a risk appetite, and are ready to take market-bound risks are willing to continue under NPS. Those who are risk-averse, more particular about government-backed security and sustainability, and on the verge of retirement are finding UPS beneficial.

It is reported that the Central Government is likely to extend pension to dependent children similar to OPS, which is absent in NPS, to push more employees towards UPS. The recent extension on the cut-off date for exercising the option for switching to UPS by eligible existing employees, past retirees, and the legally wedded spouses of deceased past retirees until September 30, 2025, and creating awareness among its 2.7 million strong employee force of the new developments, results may vary to an extent.

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The Central Government has aligned tax benefits for the Unified Pension Scheme (UPS) with the National Pension System (NPS), offering parity and relief to employees. This move ensures that UPS subscribers enjoy the same tax perks as NPS participants, under both old and new tax regimes, enhancing pension options for government employees.

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