UPS vs NPS: Good news for employees working in UPS, will get tax benefits like NPS...

There is some relief news for those doing retirement planning. The government has announced that the tax benefits available under the National Pension System (NPS) will now also apply to the new Unified Pension Scheme (UPS). The Department of Financial Services, Ministry of Finance, introduced UPS through a notification dated 24 January 2025.

This scheme has been implemented from 1 April 2025 and is available as an alternative to NPS for newly recruited employees in the Central Government Civil Services. Apart from this, existing NPS employees will also get a chance to change to UPS once. To implement this scheme, the Pension Fund Regulatory and Development Authority (PFRDA) had issued the rules related to UPS on 19 March 2025.

The government giving tax exemption like NPS to UPS also means that now both the schemes will be equal. This will also provide tax relief to the employees and encourage them to adopt the new scheme. Officials say that this step points towards the government's goal of providing transparent, flexible, and tax-friendly retirement plans.

UPS vs NPS: What changed?

The biggest criticism of NPS was that it did not have the earlier "defined benefit" system, that is, there was no fixed monthly pension. In this, a fixed amount is invested, but the return depends on the market, due to which the amount received after retirement is uncertain.

In comparison, a guaranteed pension will be given in UPS.

If the employee has served for 25 years or more, then 50% of the average salary of the last 12 months will be given as pension. Those who have served for less than 10 years will be guaranteed a pension of at least Rs 10,000 per month. Those who have served between 10 and 25 years will be given a pension in the same proportion. Also, the pension will keep increasing according to inflation through dearness allowance, which does not happen in NPS.

Contribution and benefits of UPS

Employees will contribute 10% of their basic salary and dearness allowance.

The employer (government) will also contribute the same amount and put an additional 8.5% in a separate fund.

This way, the total share of the government in UPS will be 18.5%, while in NPS it is only 14%.

UPS will also provide a lump sum payment

For every 6 months of service, 1/10th of the basic salary + DA will be given; that is, for 25 years of service, about 5 months' salary will be given. According to experts, the long-term return of UPS can be better than NPS. For example, if an employee joins UPS at the age of 25, then his lifetime return (IRR) has been estimated to be 9.37%. Whereas NPS will have to give a 12.24% annual return to give the same benefit.

As the age of the employee increases, the benefits of UPS increase, so this scheme is considered more beneficial for those who are close to retirement. The government has not only given tax benefits to UPS but has also presented it as a secure, fixed pension scheme, which can become a more attractive and reliable option than NPS.

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