Fortune India Explainer: How tax is treated under the Unified Pension Scheme for central government employees

The Government of India launched the Unified Pension Scheme (UPS) as a new retirement savings plan for central government employees. Approved by the Ministry of Finance on January 24, 2025, the scheme applies to all new recruits starting from April 1, 2025.

Existing employees enrolled in the National Pension System (NPS) can also switch to UPS. To implement this framework, the Pension Fund Regulatory and Development Authority (PFRDA) issued detailed regulations in March 2025, and the Department of Financial Services (DFS) published FAQs to clarify the tax implications and assist employees in making informed choices.

Q. How is the Central Government's contribution to the subscribers' individual corpus under the UPS taxed?

The Central government contributes 10% of the monthly emoluments (Basic Pay + Dearness Allowance) of employees to the individual corpus. This contribution is eligible for deduction under section 80 CCD (2) of the IT Act, as UPS is an option under the National Pension System.

Q. How are employee contributions to the UPS taxed?

The employee can claim a deduction under Section 80 CCD(I) of the IT Act for their contribution towards UPS, which can be up to 10% of their monthly emoluments (Basic Pay + Allowance), since UPS is an option within the National Pension System.

Q. What is the tax treatment of the government contribution to the Pool Corpus, which amounts to 8.5% of (basic pay + Dearness Allowance)?

The additional contribution from the Central government, amounting to 8.5% of monthly emoluments (basic pay plus dearness allowance), is made directly to the overall pool corpus on an aggregate basis. This contribution does not go to the individual corpus.

Therefore, this contribution is neither considered income for the employee nor classified as salary or a perquisite, and it is not subject to tax.

Q. Does a subscriber partially withdraw the amount from their individual account/corpus under the UPS, taxable?

The amount partially withdrawn, up to 25% of his own contribution from the Individual Corpus, is exempt from tax under Section 10(128) of the IT Act, 1961, as UPS is an option under the National Pension System.

Q. Upon retirement, an employee under the UPS must authorise transferring the value or units from their individual corpus to the pool corpus. What is the tax treatment of this transfer within the UPS?

For UPS subscribers, any transfer from the Individual Corpus to the pool corpus during superannuation or retirement is considered not received by the assesses in the relevant previous year. These transfers, within the UPS framework, are not subject to tax as income under Section 80 CCD(6) of the IT Act.

Q. Is income tax payable on the lump sum payment received from UPS at the time of retirement?

The lump sum payment payable to an employee at the time of superannuation or retirement is calculated as 10% of the monthly emoluments (basic pay plus dearness allowance) for every completed six months of qualifying service. This entire amount is exempt from income tax under Section 10(12AB) of the IT Act.

Q. A subscriber under the UPS is permitted to withdraw a part of the individual corpus at the time of superannuation or retirement. Is this amount taxable?

A subscriber has the option to withdraw up to 60% of either the Individual corpus or the Benchmark Corpus, whichever is lower, at the time of superannuation or retirement. This amount is exempt from tax under Section 10(12AA) of the IT Act.

Q. An employee can exercise investment choices for the Individual Corpus. If the Individual Corpus exceeds the Benchmark Corpus for a specific employee, the excess amount is credited to the employee in a lump sum. Is this excess amount taxable?

Up to 60% of the Individual's corpus is tax-exempt under Section 10(12AA) of the IT Act. Therefore, 60% of the excess of the Individual Corpus over the Benchmark corpus is also exempt. The remaining 40% of the excess amount will be subject to tax.

Q. How are payouts received by an employee under UPS taxed?

The amount of monthly payouts received by an employee is similar to a pension and, therefore, is subject to income tax under the head "Salaries".

Q. How is the tax handled for payouts received by the spouse of a deceased employee who was under UPS?

The amount of monthly family payouts, such as a Family Pension received by the spouse of a deceased UPS subscriber, is chargeable to tax under the head "Income from other sources."