Unified Pension Scheme

The Union Cabinet has approved the Unified Pension Scheme (UPS), ensuring government employees a guaranteed pension post-retirement. This scheme will take effect from April 1, 2025, transitioning central government employees from the existing National Pension System (NPS) to UPS.          

State governments will also have the option to implement the Unified Pension Scheme.

Provisions of the Unified Pension Scheme

Assured Pension: Employees will receive a pension amounting to 50% of their average basic pay over the last 12 months before retirement, provided they have a minimum qualifying service of 25 years. For shorter service periods, the amount will be proportionately reduced, with a minimum of 10 years required to qualify.

Assured Minimum Pension: Employees retiring after at least 10 years of service will receive a guaranteed minimum pension of Rs 10,000 per month.

Assured Family Pension: In the event of a retiree’s death, their immediate family will be entitled to 60% of the pension the retiree was receiving.

Inflation Indexation: The three types of pensions mentioned will include dearness relief, which will be adjusted based on the All India Consumer Price Index for Industrial Workers.

Lump Sum Payment at Retirement: In addition to gratuity, employees will receive a lump sum payment equivalent to 1/10th of their monthly emoluments (pay + DA) for every six months of completed service at retirement. This lump sum will not affect the assured pension amount.

Choice for Employees: Employees can choose to remain under the National Pension System (NPS) if they prefer. However, this decision is final and cannot be changed once made.

Differences between UPS, Old Pension Scheme (OPS) and National Pension Scheme (NPS)

Pension Calculation Method: Under the Old Pension Scheme (OPS), the pension was fixed at 50% of the last base salary plus dearness allowance (DA). In the Unified Pension Scheme (UPS), the pension is calculated as 50% of the average of the basic salary plus DA drawn in the last year before retirement. This adjustment could result in a slightly lower pension if an employee is promoted shortly before retirement.

Employee Contribution: OPS required no employee contribution. Under UPS, employees must contribute 10% of their basic pay plus DA, while the government will contribute 18.5%. Under the National Pension System (NPS), the contribution was 10% from the employee’s basic salary and 14% from the government.

Tax Benefits: Central government employees are eligible for tax benefits on the government’s contribution to the NPS scheme, allowing a 14% deduction under the Income Tax Act, 1961, in both old and new tax regimes. Since OPS did not require employee contributions, no tax benefits were available. The government has yet to clarify if contributions under the UPS scheme will be eligible for tax benefits.

Higher Minimum Pension in UPS: The UPS scheme offers a minimum pension of Rs 10,000 per month for retirement after at least 10 years of service. Currently, the minimum pension amount is Rs 9,000 for a similar service period.

Lump Sum Payments: OPS allowed for the commutation of up to 40% of the pension into a lump sum payment, which reduced the monthly pension amount. Under UPS, a lump sum payment is provided at retirement, calculated as one-tenth of the monthly salary plus DA for every six months of service, without affecting the pension amount.

NPS

• Pension Calculation Method: Under the Old Pension Scheme (OPS), the pension was fixed at 50% of the last base salary plus dearness allowance (DA). In the Unified Pension Scheme (UPS), the pension is calculated as 50% of the average of the basic salary plus DA drawn in the last year before retirement. This adjustment could result in a slightly lower pension if an employee is promoted shortly before retirement.
• Employee Contribution: OPS required no employee contribution. Under UPS, employees must contribute 10% of their basic pay plus DA, while the government will contribute 18.5%. Under the National Pension System (NPS), the contribution was 10% from the employee’s basic salary and 14% from the government.
• Tax Benefits: Central government employees are eligible for tax benefits on the government’s contribution to the NPS scheme, allowing a 14% deduction under the Income Tax Act, 1961, in both old and new tax regimes. Since OPS did not require employee contributions, no tax benefits were available. The government has yet to clarify if contributions under the UPS scheme will be eligible for tax benefits.
• Higher Minimum Pension in UPS: The UPS scheme offers a minimum pension of Rs 10,000 per month for retirement after at least 10 years of service. Currently, the minimum pension amount is Rs 9,000 for a similar service period.
• Lump Sum Payments: OPS allowed for the commutation of up to 40% of the pension into a lump sum payment, which reduced the monthly pension amount. Under UPS, a lump sum payment is provided at retirement, calculated as one-tenth of the monthly salary plus DA for every six months of service, without affecting the pension amount

The Unified Pension Scheme (UPS) seeks to balance fiscal costs with employee expectations. It aims to address the uncertainties of the National Pension System (NPS) and the high fiscal burden of reverting to the Old Pension Scheme (OPS). The UPS integrates aspects of both OPS (defined benefit) and NPS (contributory), offering a defined return on the pension pool while minimizing market risk. With assured returns and protection against inflation, the UPS is anticipated to enhance the overall pension fund and mitigate some of the risks associated with debt burden.

The End of the Blog: Unified Pension Scheme