Tax Parity For Unified Pension Scheme With NPS: A Boost For Central Govt Employees

The finance ministry has introduced tax benefits in the Unified Pension Scheme (UPS), bringing them in line with the National Pension System (NPS). This creates parity between the two schemes, a crucial step in boosting central government employees' retirement security by offering them a tax-efficient option. At present, UPS is available to the central government employees. In its statement, the ministry stated, "The Government has decided that tax benefits as available under NPS shall apply mutatis mutandis to UPS as it is an option under NPS. These provisions ensure parity with the existing NPS structure and provide substantial tax relief and incentives to employees opting for the Unified Pension Scheme."

What Is Mutatis Mutandis?

'Mutatis mutandis' means making necessary changes while retaining the core provisions. In the context of UPS and NPS, it signifies that NPS taxation rules now apply to UPS as well.

Tax Provisions Under NPS

NPS tax benefits are defined under Section 80CCD of the Income-tax Act, 1961.

Old Tax Regime (OTR):

• Section 80CCD(1) covers self-contributions up to Rs 1.5 lakh within Section 80C limits

• Section 80CCD(1B) covers an additional self-contribution of up to Rs 50,000 in NPS

• Section 80CCD(2) applies to the employer's contribution, which is 10 per cent of the basic salary

New Tax Regime (NTR):

• Section 80CCD(2), which covers the employer's contribution, also applies in the new tax regime, but with a higher limit. Under NTR, up to 14 per cent of the basic salary contributed by the employer is permitted for tax benefits

UPS On Timeline:

• August 24, 2024: The Union Cabinet, chaired by Prime Minister Narendra Modi, officially approved the UPS

• March 19, 2025: The Pension Fund Regulatory and Development Authority (PFRDA) notified the PFRDA (Operationalisation of the Unified Pension Scheme under NPS) Regulations, 2025

• April 1, 2025: UPS was implemented for the central government civil service employees

• June 30, 2025: The previous deadline for employees to switch to UPS

Out of approximately 23 lakh employees eligible for switching to UPS, very few have exercised the 'one-time' option by June 30, 2025. Thus, the government extended the last date, which is now September 30, 2025. The eligible employees can opt for UPS or stay with the NPS. As this is an irrevocable option, switching back will not be allowed once a pension option is selected.

While comparing UPS with NPS, the key difference is an assured pension. While NPS may offer a higher pension, UPS guarantees a minimum assured pension of Rs 10,000 after 10 years of service which increases to 50 per cent of the salary, subject to conditions, after 25 years of service. However, there are different factors one needs to weigh in before zeroing in on one option.

Having said that, now with clarity on the taxation part, it would be a bit easier for employees to compare and select one option.