Comparing UPS, NPS, and OPS: Which Is Right for You

Introduction

The Union Cabinet’s recent approval of the Unified Pension Scheme (UPS) marks a significant step in ensuring financial security for government employees. This scheme aims to provide an ‘Assured Pension,’ ‘Assured Family Pension,’ and ‘Assured Minimum Pension.’ Let’s explore the key features and benefits of UPS.

Key Features of UPS

1. Assured Pension:
   • The pension amount is calculated at 50% of the average basic pay drawn over the last 12 months before superannuation or retirement.
   • Employees must have a minimum qualifying service of 25 years to receive this pension.
   • For shorter service periods (minimum of 10 years), the pension will be proportionate.
   • Dearness relief based on the All India Consumer Price Index for Industrial Workers (AICPI-IW) will also apply to the assured pension.

2. Assured Family Pension:
   • In case of an employee’s demise, the family will receive a family pension.
   • The family pension is 60% of the pension amount immediately before the employee’s death.

3. Assured Minimum Pension:
   • Employees are guaranteed a minimum pension of Rs 10,000 per month upon superannuation after a minimum of 10 years of service.

4. Lump-Sum Payment and Gratuity:
   • Besides the pension, employees will receive a lump-sum payment at superannuation.
   • This payment is one-tenth of the monthly emolument (pay + DA) for every completed six months of service.
   • Importantly, this payment does not reduce the quantum of the assured pension.

Effective Date and Employee Choice

• The UPS will be effective from April 1, 2025.
• Employees will have the option to choose between the National Pension Scheme (NPS) and the UPS.

Benefits of the Unified Pension Scheme (UPS)

• Financial Security: The assured pension and family pension provide financial stability for retirees and their families.
• Flexibility: Employees have the option to choose the scheme that best suits their needs.
• Minimum Pension Guarantee: Ensures a safety net against inflation and financial uncertainties post-retirement.

Tax Implications of the Unified Pension Scheme

The tax implications of the Unified Pension Scheme (UPS) are designed to provide certain benefits to government employees. Here are the key points:

Tax Benefits Under the Unified Pension Scheme (UPS)

1. Tax-Free Pension: The pension received under the UPS is tax-free, similar to the Old Pension Scheme (OPS). This means that the monthly pension amount is not subject to income tax.
2. Gratuity: The lump sum gratuity payment received at the time of retirement is also tax-free up to a certain limit, as per the Income Tax Act. This provides a significant tax benefit to retirees.
3. Dearness Relief: The dearness relief, which is adjusted based on the All India Consumer Price Index for Industrial Workers (AICPI-IW), is also exempt from tax.
4. Family Pension: The family pension received by the dependents of a deceased employee is subject to tax, but it is eligible for a standard deduction under Section 57(iia) of the Income Tax Act.
5. Minimum Pension: The assured minimum pension of ₹10,000 per month is also tax-free, ensuring that even employees with lower pay scales receive a tax-free pension amount.

Pension Calculation

Under the Unified Pension Scheme (UPS), the pension calculation is designed to provide a fair and assured income for government employees post-retirement. Here are the key details on how the pension is calculated:

Pension Calculation Method

1. Assured Pension Amount:
   • 50% of Average Basic Pay: The pension amount is calculated as 50% of the average basic pay from the last 12 months of service before retirement¹.
   • Eligibility: To qualify for this full benefit, employees must have completed a minimum of 25 years of service.
2. Proportionate Pension for Shorter Service:
   • For employees with less than 25 years but more than 10 years of service, the pension is proportionate to their length of service.
   • Example: If an employee has completed 20 years of service, their pension would be calculated as: Pension = 20/25 *50% of Average Basic Pay
3. Minimum Pension Guarantee:
   • The scheme guarantees a minimum pension of ₹10,000 per month for employees who have completed at least 10 years of service.

Example Calculation

Let’s consider an example to illustrate the pension calculation:

• Average Basic Pay (last 12 months): ₹60,000
• Years of Service: 30 years

For an employee with 30 years of service: Pension = 50% *60,000 = ₹30,000

For an employee with 20 years of service: Pension= 20/25 * 50% of 60,000 = 0.8 *30,000 = ₹24,000

Family Pension

In the event of an employee’s death, their family will receive 60% of the pension the employee was receiving.

For example, if the employee’s pension was ₹30,000, the family pension would be: Family Pension = 60% * 30,000 = ₹18,000

Inflation Indexation

The pensions under UPS are indexed to inflation based on the All-India Consumer Price Index for Industrial Workers (AICPI-IW), helping to maintain the purchasing power of the pension over time.

Significance

• Financial Security: The assured pension amount and inflation indexation provide financial stability and security for retirees.
• Inclusivity: The scheme ensures that even employees with shorter service periods receive a proportionate pension, with a guaranteed minimum amount.

Gratuity Under the Unified Pension Scheme (UPS)

Under the Unified Pension Scheme (UPS), gratuity is an important component that provides a lump-sum payment to government employees upon their retirement. Here are the key details about gratuity under the UPS:

Gratuity Details Under UPS

1. Lump-Sum Payment: At the time of superannuation, employees will receive a lump-sum gratuity payment in addition to their pension.
2. Calculation Method: The gratuity amount is calculated as 1/10th of the monthly emolument (which includes basic pay and dearness allowance) for every completed six months of service. This means that for each half-year of service, the employee is entitled to 10% of their monthly emolument as gratuity.
3. No Reduction in Pension: The lump-sum gratuity payment does not reduce the assured pension amount. Employees will receive their full pension benefits in addition to the gratuity.
4. Additional Financial Security: The gratuity provides an additional financial cushion for retirees, helping them manage their post-retirement expenses more comfortably.

Example Calculation

Let’s consider an example to illustrate how gratuity is calculated:

• Monthly Emolument (Basic Pay + Dearness Allowance): ₹50,000
• Years of Service: 30 years

For every completed six months of service, the employee receives 1/10th of their monthly emolument. Therefore, for 30 years (which is 60 completed six-month periods):

Gratuity = 60 Times \( 1/10\times 50,000 ) = 60 \times 5,000 = ₹3,00,000 ]

In this example, the employee would receive a gratuity of ₹3,00,000 upon retirement.

Significance of Gratuity

• Financial Stability: The gratuity payment provides a significant lump sum that can be used for various post-retirement needs, such as medical expenses, travel, or even investments.
• Recognition of Service: It serves as a recognition of the employee’s long-term service and dedication to the government.

The inclusion of gratuity in the UPS ensures that government employees have a robust financial safety net as they transition into retirement.

How can employees opt for UPS?

Employees can opt for the Unified Pension Scheme (UPS) through the following steps:

1. Choice at the Time of Joining Service:
   • New government employees will have the option to choose between the National Pension Scheme (NPS) and the UPS.
   • They can indicate their preference during the joining process.
2. Existing Employees:
   • Existing government employees can also switch to the UPS.
   • They need to express their choice through the prescribed form or online portal provided by their respective departments.
3. Effective Date:
   • The UPS will be effective from April 1, 2025.

Remember, employees should carefully consider their options and make an informed decision based on their individual circumstances.

Can employees opt for a lump-sum payment instead of monthly pensions under UPS?

Under the Unified Pension Scheme (UPS), employees have the option to choose between a monthly pension and a lump-sum payment. Here’s how it works:

1. Monthly Pension:
   • By default, employees receive a regular monthly pension based on their years of service and average salary.
   • The pension amount is calculated as 50% of the average basic pay drawn over the last 12 months before superannuation or retirement.
2. Lump-Sum Payment:
   • Alternatively, employees can opt for a lump-sum payment.
   • This payment is one-tenth of the monthly emolument (pay + DA) for every completed six months of service.
   • Importantly, choosing the lump-sum payment does not reduce the quantum of the assured pension.
3. Individual Choice:
   • Employees can make an informed decision based on their financial needs and preferences.
   • Some may prefer a steady monthly income, while others may opt for the lump-sum amount.

Can employees switch back to NPS after choosing UPS?

Employees who initially choose the Unified Pension Scheme (UPS) can switch back to the National Pension Scheme (NPS) if they wish. Here are the steps:

1. Reversal Request:
   • Employees need to submit a formal request to their respective departments expressing their desire to switch back to the NPS.
   • This request should include relevant details such as employee ID, service details, and reasons for the change.
2. Processing Time:
   • The department will process the request based on administrative procedures.
   • The exact processing time may vary, but employees should follow up with their HR or pension cell for updates.
3. Effective Date:
   • The switch will take effect from the date specified by the department.

How can employees track their pension contributions under UPS?

Employees can track their pension contributions under the Unified Pension Scheme (UPS) through the following methods:

1. Online Portal:
   • Log in to the designated online portal provided by the government or relevant authorities.
   • Check your pension account to view details of your contributions, accrued benefits, and other relevant information.
2. Annual Statements:
   • You will receive an annual statement in your pension account.
   • This statement shows the total value of your pension, including contributions and any inflation-linked increases.

What happens if an employee changes their job within the government?

When a government employee changes their job within the same government, their pension contributions and benefits remain intact. Here’s how it works:

1. Transfer of Service:
   • If an employee moves from one government department to another (e.g., from the Ministry of Finance to the Ministry of Health), their service years are transferred.
   • The new department recognizes their previous service, ensuring continuity.
2. Pension Accumulation:
   • The employee’s pension contributions continue to accumulate based on their new salary and service years.
   • The assured pension calculation considers the cumulative service across different departments.
3. Superannuation Benefits:
   • Upon retirement, the employee receives a pension based on the total service across all government jobs.
   • The pension amount is calculated as 50% of the average basic pay drawn over the last 12 months before superannuation.
4. Family Pension:
   • In case of the employee’s demise, the family will receive a family pension based on the total service.

Can employees claim deductions for employer contributions to UPS?

Employees can claim deductions for employer contributions to the Unified Pension Scheme (UPS) under Section 80CCD(2) of the Income Tax Act. Here’s how it works:

1. Employer Contribution:
   • The employer contributes a portion of the employee’s salary to the UPS.
   • This contribution is over and above the employee’s own contributions.
2. Tax Deduction:
   • The employer’s contribution is eligible for tax deduction.
   • The maximum deduction allowed is 10% of the employee’s salary (basic + DA).
   • However, this deduction is subject to an overall limit of ₹7.5 lakh.
3. Combined Benefit:
   • When calculating tax benefits, both the employee’s and employer’s contributions are considered.
   • Employees can claim deductions for their own contributions under Section 80CCD(1) (within the overall limit of ₹1.5 lakh).

What are the tax implications for each scheme?

Let’s explore the tax implications for each of the pension schemes in India:

1. Unified Pension Scheme (UPS):
   • Employee Contributions:
     • Employees contribute 10% of their income towards their pension each year.
     • Tax deduction up to 10% of salary (Basic + DA) under Section 80CCD(1) within the overall ceiling of ₹1.5 lakh under Section 80CCE.
     • Additional deduction up to ₹50,000 under Section 80CCD(1B) over and above the overall limit of ₹1.5 lakh.
   • Employer Contributions:
     • The government’s contribution is likely to increase to 18.5% from the earlier 14%.
   • Other Benefits:
     • Lump-sum payment at retirement (one month’s salary for every five years of service).
     • Family pension (60% of pension immediately after the employee’s demise).
     • Assured minimum pension of ₹10,000 per month after 10 years of service.
2. National Pension Scheme (NPS):
   • Employee Contributions:
     • Tax deduction up to 10% of salary (Basic + DA) under Section 80CCD(1) within the overall ceiling of ₹1.5 lakh under Section 80CCE.
     • Additional deduction up to ₹50,000 under Section 80CCD(1B) over and above the overall limit of ₹1.5 lakh.
   • Employer Contributions:
     • Eligible for tax deduction up to 10% of salary (Basic + DA) (14% if contributed by the Central Government) under Section 80CCD(2).
   • Withdrawals and Annuity:
     • Tax exemption on partial withdrawals (up to 25% of self-contribution).
     • Tax exemption on annuity purchase upon reaching age 60 or superannuation.
     • Lump-sum withdrawal of 60% of accumulated pension wealth upon retirement is eligible for tax exemption.
3. Existing Pension Scheme (OPS):
   • Tax Treatment:
     • Pension income is taxable in India.
     • Tax implications depend on the type of pension received:
       • Annuity pension: Fully taxable.
       • Commuted pension (for government employees): Fully exempt from tax.
       • Uncommuted pension: Taxed as salary income

Comparison with Previous Schemes

The UPS incorporates the best elements of both the Old Pension Scheme (OPS) and the New Pension Scheme (NPS), addressing the primary criticism of NPS, which was the lack of a guaranteed pension amount

Here’s a comparison table highlighting the key features of the Old Pension Scheme (OPS), the New Pension Scheme (NPS), and the Unified Pension Scheme (UPS):

Feature	Old Pension Scheme (OPS)	New Pension Scheme (NPS)	Unified Pension Scheme (UPS)
Pension Amount	50% of the last drawn salary	Market-linked, depends on contributions and returns	50% of the average basic pay of the last 12 months
Family Pension	60% of the pension of the employee	Market-linked, depends on contributions and returns	60% of the pension of the employee
Minimum Pension	No minimum pension guarantee	No minimum pension guarantee	₹10,000 per month for employees with a minimum service of 10 years
Eligibility	Minimum 10 years of service	Minimum 10 years of service	Minimum 25 years of service for full benefits; proportionate pension for 10-25 years of service
Employee Contribution	None	10% of basic salary + DA	None
Government Contribution	Fully funded by the government	14% of basic salary + DA	Fully funded by the government
Flexibility	Fixed benefits	Investment options available	Option to choose between NPS and UPS
Tax Benefits	Tax-free pension	Tax benefits on contributions under Section 80C and 80CCD(1B)	Tax-free pension
Implementation Date	Before 2004	January 1, 2004	April 1, 2025

Conclusion

The Unified Pension Scheme (UPS) represents a significant reform in ensuring financial stability for government employees during their retirement years. With its assured benefits and flexibility, it aims to provide a safety net for those who have dedicated their careers to public service.

Remember, financial planning is crucial, and understanding pension schemes empowers employees to make informed decisions about their future.

Frequently Asked Questions (FAQ) 

1. What is the Unified Pension Scheme (UPS)?
   • The UPS is a pension scheme recently approved by the Indian government for its employees. It aims to provide financial security during retirement.
2. How is the pension amount calculated under UPS?
   • The pension is calculated as 50% of the average basic pay drawn over the last 12 months before superannuation or retirement.
3. Is there a minimum pension guarantee?
   • Yes, employees are assured a minimum pension of ₹10,000 per month after a minimum of 10 years of service.
4. Can employees choose between NPS and UPS?
   • Yes, employees have the choice between the National Pension Scheme (NPS) and the UPS.
5. What happens if an employee changes jobs within the government?
   • Service years are transferred, and the pension calculation considers cumulative service across different departments.
6. Are lump-sum payments available under UPS?
   • Yes, employees can opt for a lump-sum payment (one-tenth of monthly emolument for every completed six months of service).
7. How does UPS compare to NPS and the existing pension scheme (OPS)?
   • UPS combines features from both NPS and OPS, offering assured benefits, family pension, and inflation indexation.
8. What tax benefits are available under UPS?
   • Employees can claim deductions for contributions under Section 80CCD(1) and 80CCD(1B).
9. Can employees switch back to NPS after choosing UPS?
   • Yes, employees can switch back based on formal requests to their departments.
10. Is UPS effective immediately?
    • The UPS will be effective from April 1, 2025.