All You Need to Know About the Unified Pension Scheme
Mitali Dhoke
Aug 27, 2024 / Reading Time: Approx. 10 mins
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On August 24, 2024, Saturday, the Modi 3.0 government's union cabinet approved the Unified Pension Scheme (UPS) for central government employees who joined service after January 01, 2004, and retiring on or before March 31, 2025, with arrears.
Post the cabinet meeting, Union Minister Ashwini Vaishnaw said, "The UPS, set to commence from April 01, 2025, will increase the government's contribution from the current 14 per cent to 18.5 per cent, resulting in an estimated additional annual cost of Rs 6,250 crore."
The Unified Pension Scheme (UPS) is a newly introduced framework that aims to consolidate and streamline pension schemes in India. The UPS seeks to address the challenges and limitations of existing pension systems, such as the Old Pension Scheme (OPS) and the National Pension System (NPS), by offering a unified approach to retirement planning.
This article provides a comprehensive overview of the UPS, highlighting its features and comparing it with OPS and NPS to help you make an informed decision about your retirement planning.
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Introduction to the Unified Pension Scheme (UPS)
The Unified Pension Scheme (UPS) is a government initiative designed to integrate various pension schemes under one umbrella, ensuring uniformity, efficiency, and better management of pension funds. The primary objective of UPS is to provide a sustainable, flexible, and secure retirement solution for all individuals.
The introduction of UPS comes in response to the evolving demographic landscape, increasing life expectancy, and the need for a robust social security system. The UPS aims to provide a comprehensive solution that meets the financial needs of retirees while also addressing issues like portability, transparency, and equitable distribution of benefits.
Key Features of the Unified Pension Scheme (UPS)
The UPS is characterised by several key features that set it apart from the existing pension schemes like OPS and NPS:
1. Uniform Pension System: The UPS aims to replace the existing disparate pension schemes with a single, unified system. This will ensure consistency in pension calculations and payments across various government departments.
2. Enhanced Benefits: Employees will benefit from an improved pension structure that promises better financial security in retirement. The scheme includes provisions for arrears, ensuring that retirees receive any pending dues. The improved pension benefits under the UPS are designed to offer better financial security for retirees, helping them maintain a comfortable standard of living.
3. Effective Date: The UPS will come into effect on April 01, 2025. Employees retiring before this date will also be covered, with arrears adjusted accordingly.
4. Integration with Existing Systems: The new scheme will integrate with the current pension management systems to facilitate a smooth transition and avoid disruptions in pension disbursements.
5. Support for Retirees: The UPS includes measures to support retirees, including streamlined processing of pension claims and enhanced transparency in pension management. The consolidation of pension schemes into a single framework will simplify administrative processes, reduce bureaucratic delays, and enhance the overall efficiency of pension management.
[Read: Retirement Planning 101: Key Strategies for a Comfortable Retirement]
What Does the Unified Pension Scheme (UPS) Offer to Retirees?
1. Eligibility and Pension Structure:
Guaranteed Pension: Central government employees are assured a pension upon retirement.
Pension Amount: Employees with a service period of at least 25 years will receive a pension equal to 50% of their average basic pay over the final 12 months before retirement. For those with shorter service periods, the pension amount will be adjusted proportionately, with a minimum service requirement of 10 years.
2. Minimum Pension Guarantee:
Base Pension: Regardless of service length, retirees will receive a minimum monthly pension of Rs 10,000 if they have completed at least 10 years of service.
3. Additional Benefits at Retirement:
Lump Sum Payment: On retirement, employees will receive a lump sum payment, calculated as 1/10th of their monthly emoluments (Pay + Dearness Allowance) for every six months of service completed. This payment is separate from and will not reduce the assured pension amount.
4. Family Pension Provision:
Survivor Benefits: In the event of a retiree's death, the family will be eligible for a family pension. This pension will be 60% of the retiree's pension amount just before death.
5. Inflation Protection:
Indexation Benefit: To help retirees keep up with inflation, the UPS includes an inflation indexation benefit. This adjustment will be applied to the assured pension, minimum pension, and family pension based on the All-India Consumer Price Index for Industrial Workers (AICPI-IW).
Comparing the Unified Pension Scheme (UPS) with OPS and NPS
To better understand the advantages of the UPS, it is essential to compare it with the Old Pension Scheme (OPS) and the National Pension System (NPS).
| Features |
Old Pension Scheme (OPS) |
National Pension Scheme (NPS) |
Unified Pension Scheme (UPS) |
| Pension Guarantee |
50% of their last drawn 'basic' salary as a monthly pension |
No fixed pension |
50% of average basic pay over the last 12 months before retirement. For service between 10-25 years, proportional |
| Type |
Defined Benefit |
Defined Contribution |
Hybrid (Defined Benefit + Defined Contribution) |
| Investment Options |
None (Government Liability) |
Equity, Debt, Government Securities |
Equity (E), Corporate Debt (C), and Government Securities (G), AIF, REITs, InvITs, etc. |
| Contributions |
No contribution from employees, the government bears the entire cost |
Employees contribute 10% of their salary, while the government contributes 14% |
Employees contribute 10% of their salary, while the government contributes 18.5% |
| Risk |
Low |
Medium-to-High (depending on the underlying investment) |
Low to Moderate |
| Return Potential |
Low |
Higher |
Limited |
| Protection against Inflation |
Pension amount adjusted via dearness allowance |
No standardised inflation protection, pension is market-linked |
Linked to all India Consumer Price Index (CPI) for industrial workers |
| Family Pension |
30% to 50% of the employee's pension upon their death |
No fixed pension varies according to the accumulated corpus and annuity plans at retirement |
60% of the employee's pension upon their death |
| Lump Sum Payments |
Only through pension commutation |
Market-linked, partial withdrawal allowed |
Defined payment of 1/10th of monthly emoluments (incl. pay + DA) for every six months of service, in addition to gratuity. |
| Taxation |
No tax benefits |
14% deduction on government contribution. Section 80C, 80CCD(1B) |
Clarity is needed on tax benefits for both employee and government contributions |
| Regulated by |
Fully Funded by Government |
Regulated by PFRDA |
Supported and Regulated by Government |
(The table above is for illustration purposes only)
Given that, the UPS combines features of both OPS and NPS, providing a guaranteed pension with enhancements like a minimum pension guarantee and lump sum payments. It offers a stable retirement income with low to moderate risk, bridging the gap between the predictability of OPS and the growth potential of NPS. This scheme is well-suited for those who desire a reliable income with additional benefits, while still benefiting from some of the features associated with modern pension planning.
[Read: NPS Withdrawal Rule Change: Know What It Means to the NPS Subscribers]
What Will Be the Tax Implications for UPS?
Under the Unified Pension Scheme (UPS), pensions received by central government employees are taxed according to their income tax slab, similar to the National Pension System (NPS).
Family pensions, paid as a lump sum (commuted pension), are exempt from tax under Section 10(10A) of the Income Tax Act. For monthly pensions (uncommuted portion), the tax exemption is limited to the lower of 1/3rd of the uncommuted pension received or Rs 15,000.
Additionally, the deduction for family pensions has been increased to Rs 25,000 per financial year, effective from July 23, 2024. Clarification on the tax treatment of lump sum payments upon superannuation is still pending.
To conclude...
The Unified Pension Scheme (UPS) represents a significant development in the pension landscape for central government employees, offering a blend of stability and enhanced benefits.
While several non-BJP ruled states are exploring a return to the DA-linked Old Pension Scheme (OPS) due to employee demands, the Unified Pension Scheme (UPS) offers a significant advantage by providing guaranteed pensions along with features like a minimum pension guarantee and lump sum payments, effectively addressing key retirement security concerns.
While some may argue that the UPS represents a departure from the market-based reforms of the National Pension System (NPS), it is important to recognise the benefits it offers.
The potential for the UPS to influence pension policies beyond the central government is significant. Maharashtra cabinet, on August 25, 2024, has already decided to implement the UPS for its state government employees, and there is a possibility that other states may follow suit. If this trend continues, broader adoption could reshape the pension landscape, making the UPS a key player in the future of retirement planning.
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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.