UPS Taxation: PFRDA Clarifies Tax Benefits Amidst Minimal Adoption

The Pension Fund Regulatory and Development Authority (PFRDA) has issued FAQs on the taxation of the Unified Pension Scheme (UPS), clarifying the tax liability under various sections of the Income-tax Act, 1961. The government launched UPS for central government employees on April 1, 2025, as an option for them to choose between the existing National Pension System (NPS) and UPS. The deadline to exercise the switch option to change one’s pension scheme from NPS to UPS was June 30, which was later extended to September 30, 2025. Notably, the adoption of UPS was minimal, with around 1 per cent of the total eligible employees by mid-July.

After the scheme began, the government announced several changes, including those about taxes. Earlier, the government said that the tax benefit under NPS will apply mutatis mutandis to UPS. It means similar taxation rules apply to UPS. The recently issued FAQs by the PFRDA now give clearer details on how the UPS will be taxed under different sections of the Income-tax Act. Here are the details.

Tax Benefits Under Different Sections Of The Income-Tax Act, 1961:

• Section 80CCD(1): An Employee can get a tax deduction for up to 10 percent of their monthly salary (Basic + DA).

• Section 80CCD(2): The employer’s contribution (10 per cent) of the monthly salary (Basic + Dearness allowance—DA) to the individual corpus is allowed as a deduction.

• In the UPS, the government contributes a total of 18.5 per cent additional contribution to the individual corpus, of which 10 per cent is eligible for deduction (mentioned above). The remaining 8.5 per cent of the government’s contribution goes to the pool corpus, and it is not considered as salary or a perquisite for employees. So, this 8.5 per cent contribution is not taxable in the hands of employees.

• Section 10(12B): Partial withdrawal (up to 25 per cent) from the employee’s contribution in the individual corpus is exempt from tax. Besides, the lump sum payment (10 per cent of the monthly salary (Basic pay + DA for every completed six months of qualifying service) at the time of superannuation or retirement is also tax exempt under this Section.

• Section 80 CCD(6): Any transfer from the individual corpus to the pool corpus at the time of superannuation or retirement is not taxable.

• Section 10(12AA): 60 per cent of the Individual corpus is exempted from taxation.

• Note that in the case of UPS, the corpus to be considered for pension payment will be the lower of the Individual corpus and the benchmark corpus. If the Individual corpus exceeds the benchmark corpus, the excess amount will be transferred to the employee in a lump sum. Similar to the one-time lump sum tax treatment, 60 per cent of this excess corpus will be tax-free, and the remaining 40 per cent will be taxable.