Government Extends Deadline for NPS to UPS Transition
The Indian government has announced significant changes to pension benefits for central government employees, extending the deadline to switch from the National Pension System (NPS) to the Unified Pension Scheme (UPS) until September 30, 2025. This decision aims to provide clarity on tax incentives and ensure parity with existing NPS structures. Under the new framework, employees opting for UPS will now enjoy tax benefits comparable to those under NPS, including deductions under Section 80CCD(1) and Section 80CCD(1b). The move is expected to address previous uncertainties that discouraged employees from transitioning to UPS, which offers a guaranteed monthly payout post-retirement.
Tax Benefits and Contribution Structures Under UPS
The Unified Pension Scheme introduces a dual contribution model, with employees contributing 10% of their basic pay and dearness allowance (DA), matched by the Central Government at the same rate. An additional 8.5% contribution will be allocated to the pool corpus to ensure assured payouts. Tax benefits under UPS mirror NPS provisions, allowing deductions of up to 14% of basic salary + DA under Section 80CCD(2). However, experts emphasize the need for clarity on maximum deduction limits, as UPS contributions exceed NPS thresholds, potentially offering greater financial advantages.
Comparing NPS and UPS Tax Regimes
Under the old tax regime, NPS beneficiaries could claim deductions under three sections: Section 80CCD(1) for personal contributions, Section 80CCD(1b) for an additional Rs 50,000, and Section 80CCD(2) for employer contributions. The new regime simplifies this to Section 80CCD(2), with a cap of 14% of basic salary + DA. UPS, however, offers a higher employer contribution of 18.5%, which could translate to larger tax savings. Chartered accountants suggest that UPS subscribers may now claim deductions under Section 80CCD(2) equivalent to their 18.5% employer contribution, surpassing NPS benefits.
UPS Structure and Assured Payouts
The Unified Pension Scheme operates from April 1, 2025, and guarantees a monthly payout based on employees’ qualifying service periods. Retirees with at least 25 years of service will receive 50% of their 12-month average basic pay, while those with shorter tenures will get proportionate payouts. A minimum assured payout of Rs 10,000 per month is guaranteed for employees retiring after 10 years of service, provided contributions are consistently made. This structure aims to provide financial stability, contrasting with the fund-based NPS model that relies on investment returns.
Expert Insights on UPS Taxation
Industry experts highlight the significance of the government’s clarification on tax parity between NPS and UPS. Naveen Wadhwa of Taxmann.com notes that UPS now aligns with NPS benefits, offering clarity to employees. However, uncertainties remain regarding the exact limits of Section 80CCD(2) deductions for UPS contributors. CA Ashish Niraj of A S N & Company emphasizes that the higher 18.5% employer contribution under UPS may unlock greater tax benefits, potentially making it a more attractive option for central government employees seeking assured retirement income.
About the Author
