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The finance ministry has announced that tax benefits available under the National Pension System (NPS) will also be applicable to the newly introduced Unified Pension Scheme (UPS).
UPS has been notified as an option under the NPS.
Unified Pension Scheme Tax Benefit: The finance ministry on Friday announced the government has decided to extend the tax benefits available under the National Pension Scheme (NPS) to the newly introduced unified pension scheme (UPS). It said the move will ensure parity with the existing NPS structure and provide substantial tax relief and incentives to employees opting for the UPS.
“In a bid to provide further impetus to the UPS, the government has decided that tax benefits as available under NPS shall apply mutatis mutandis to UPS as it is an option under NPS,” the finance ministry said in a statement on July 4, 2025.
The ministry said this decision would ensure parity between NPS and UPS and offer the same level of tax relief and savings incentives to employees choosing UPS.
Last month, Union Minister Jitendra Singh said all central government employees part of the Unified Pension Scheme (UPS) will now be eligible for retirement and death gratuity benefits available under the Old Pension Scheme (OPS).
Central government employees covered under the UPS will now be eligible for retirement and death gratuity benefits, as per the provisions of the Central Civil Services (Payment of Gratuity under National Pension System) Rules, 2021, Singh said.
What Are The Tax Benefits Under NPS?
Here are the tax benefits under the National Pension System (NPS), which now also apply to the Unified Pension Scheme (UPS):
For Employees (Salaried Individuals):
1. Section 80CCD(1):
- Deduction up to 10% of salary (Basic + DA).
- Included in the overall Rs 1.5 lakh limit under Section 80C.
2. Section 80CCD(1B):
- Additional deduction up to Rs 50,000 (over and above 80C limit).
- Exclusive to NPS/UPS – great tax-saving opportunity.
3. Section 80CCD(2):
- Employer’s contribution up to 10% of salary is fully deductible.
- No monetary limit; available over and above Rs 1.5 lakh and Rs 50,000.
On Withdrawal at Retirement (60 years):
- 60% of total corpus is tax-free.
- Remaining 40% must be used to buy an annuity, which is taxable as per income slab (pension received from annuity is taxable).
On Partial Withdrawal (before retirement):
- Up to 25% of own contribution is tax-free, subject to certain conditions (like medical treatment, higher education, etc.).
What is the Unified Pension Scheme?
The UPS, which was notified by the government on January 24, 2025, is an option under National Pension System (NPS) which provides assured pension income like old pension scheme (OPS). The scheme got implemented from April 1, 2025.
Central government employees have time till September 30 to opt for the UPS scheme.
The Union Cabinet in August 2024 approved the Unified Pension Scheme (UPS), for an assured pension post-retirement. The UPS has been implemented from April 1, 2025. The move comes after the long-pending demand of the central government employees to reform the new pension scheme (NPS).
It is the latest pension scheme for government employees.
Under the UPS, there will be a provision of a fixed assured pension, unlike the New Pension Scheme (NPS) which does not promise a fixed pension amount.
The Unified Pension Scheme has five pillars:
Assured Pension: Under the UPS, the fixed pension will be 50 per cent of the average basic pay drawn over the last 12 months prior to superannuation for a minimum qualifying service of 25 years. This pay is to be proportionate for lesser service period up to a minimum of 10 years of service.
Assured Family Pension: It will also have an assured family pension, which is 60 per cent of the pension the employee was receiving. It will be given immediately in case of the retiree’s demise.
Assured Minimum Pension: In the case of superannuation after a minimum 10 years of service, the UPS has a provision of an assured minimum pension of Rs 10,000 per month.
Inflation Indexation: There is a provision of indexation benefit on assured pension, on assured family pension and assured minimum pension.
Gratuity: Lump-sum payment at superannuation in addition to gratuity. It will be 1/10th of the monthly emolument (pay + dearness allowance) as on the date of superannuation for every completed six months of service. This payment will not reduce the quantum of assured pension.
Haris is Deputy News Editor (Business) at news18.com. He writes on various issues related to markets, economy and companies. Having a decade of experience in financial journalism, Haris has been previously asso…Read More
Haris is Deputy News Editor (Business) at news18.com. He writes on various issues related to markets, economy and companies. Having a decade of experience in financial journalism, Haris has been previously asso… Read More
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