Salient Feature of Newly Introduced Unified Pension Scheme (UPS) For Govt. Employees

Summary: The newly introduced Unified Pension Scheme (UPS), effective from April 2025, aims to blend features of the Old Pension Scheme (OPS) and the National Pension Scheme (NPS). It provides government employees a guaranteed pension equal to 50% of their average salary (Basic + DA) from their last 12 months of service, with inflation adjustments. Employees contribute 10% of their salary, while the government’s contribution rises to 18.5%. UPS offers a minimum pension of Rs. 10,000 and includes family pension benefits. Unlike the market-dependent NPS, UPS guarantees a fixed pension. However, concerns have been raised regarding the potential fiscal burden on the government and the transition from NPS, which might affect existing pension fund management. Although UPS benefits a small section of the workforce—central government employees—it represents a step toward a more secure retirement system. States can also adopt UPS if desired. Key differences from OPS and NPS include inflation indexation, a higher government contribution, and a defined pension system. Also Read: Comparative view on Unified Pension Scheme: Is It a Better Choice?

What Is Old Pension Scheme (OPS)?

The Old Pension Scheme (OPS) is a retirement benefit scheme under which Government employees receive a monthly pension after retirement.  It is a defined benefit pension plan.  It provides a guaranteed pension to Government employees, who have completed at least 10 years of service, based on their last drawn salary (Basic +DA) and the number years of service rendered. The retired employees also get the benefit of the revision of Dearness Allowance (DA) twice in a year on the pension amount.

Nothing is deducted from employees’ salaries, towards pension, when they are in service and therefore the Government takes the full responsibility to pay the entire amount of pension.

Who Can opt For the Old Pension Scheme?

Old Pension Scheme (OPS) in India was abolished from 1^st January 2004 as a part of pension reforms by the Union Government. Only Government Employees (Central and State) who joined service before 1^st January 2004 are eligible for the OPS and those who joined service on or after 1^st January 2004 is automatically enrolled in NPS.

Advantages and Disadvantages of Old Pension Scheme

SL	Advantage	Disadvantage
1	Pension without Contribution: No contribution is made by the employee is the OPS	Burden on Government: Massive burden on the Central and State Government for the pension liability.
2	Life Long Income: It assures life-long income to employees’ post-retirement without any deduction from the salary during the service.	No corpus Created: No any corpus is created for pensions which could grow continuously and reduce the Government’s liability for pension outflow.
3	Inflation Indexation: Employee’s pension increases with the revision of DA twice in a year.	Unsustainable For the Government: It is unsustainable as the OPS do not have accumulated funds or stock of savings for pension obligations and hence it is a clear-cut fiscal burden on the Government.
4	Government Burden: The Government bears the entire expenditure on pension liability.	Extended Pension Pay-out: Since life expectancy has increased due to better health facilities, the Government has to bear the extended pension pay-outs and the pension liabilities would keep increasing every year.

What Is National Pension Scheme (NPS)? 

After abolishing the OPS, the NDA Government introduced the National Pension Scheme (NPS) for Government employees in 2004.

The Government extended the scope of NPS for all citizens, including self-employed and unorganised workers in 2009. It remained voluntary for the workforce in the unorganized sector. It is a pension scheme where citizens can contribute an amount every month till 60 years and receive a pension after retirement. NPS marked a shift from the defined benefit to defined contribution system.

Under the NPS, Government employees can contribute 10% of their basic salary plus Dearness Allowance (DA), and the Government contributes 14% of the basic pay + DA every month. Other citizens can contribute a minimum of Rs.500 monthly towards NPS. This is administered by the Pension Fund Regulatory and Development Authority (PFRDA).

The contributions under the NPS are consolidated into a pension fund (which is managed by the Professional Fund managers) which is invested in a diversified portfolio of Equity (E), Government bonds (G) and Corporate Bonds (C). Upon retirement, an individual can withdraw up to 60% of the accumulated corpus in the NPS account and from the remaining 40% they can buy annuity from any of the ten professional fund managers to receive a monthly pension.

Advantages and Disadvantages of New Pension Scheme( NPS)

SL	Advantage	Disadvantage
1	Lum sum Withdrawal Facility: Employees can withdraw tax free up to 60% of the corpus upon retirement	Pension amount is not fixed: Since it is a market-linked product therefore pension amount is not fixed.
2	Choice of Professional Fund Manager: Facility to select fund managers to get the best returns.	Lack of Financial Literacy: Many people are unaware of financial terms, such as equities, debt, securities, etc. Hence, they may fail to choose the best product mix and fund manager for their investments.
3	Transparent Investment Norms:  PFRDA regulates the scheme with transparent investment norms, regular performance reviews and monitoring of fund managers by NPS trust, making it a safe investment option.	Not Linked with Inflation: NPS does not give any increase in DA as available in OPS and UPS
4	Premature Withdrawal Facility:  Employees have opportunity to withdraw some amount of NPS contributions even before retirement	No Assured Pension: NPS has lacked the assured benefit of OPS, making it less attractive for the employees

What is Unified Pension Scheme?

In March 2023, the Government established a committee chaired by the then finance secretary Shri T. V. Somanathan to explore the option for enhancing the NPS benefit without going back to non- contributory and fiscally unsustainable old pension scheme (OPS). This move came in response to several States shifting back from the NPS to OPS. So, this scheme is based on the recommendations of Shri T. V. Somanathan Committee and will be effective from April 1, 2025.The UPS proposes amalgamate advantages of both Old Pension Scheme (OPS) and New Pension Scheme (NPS). It represents a forward-looking approach to retirement planning in India, aiming to provide a secure and sustainable pension system for all eligible employees. It aims to provide long-term financial security to Government employees while maintaining flexibility and choice. UPS currently for Central Government employees, but States can also adopt it.

Key Features of the Unified Pension Scheme (UPS)

• Guaranteed Pension: Under the UPS, eligible employees are assured a pension equal to 50% of their average salary (Basic + DA) drawn over the last 12 months prior to superannuation from rendering service of 25 years. For service periods between 10 and 25 years, the pension will be proportional.

• Assured Minimum Pension: Upon superannuation after a minimum of 10 years of service, employees will receive an assured minimum pension of Rs 10,000 per month.
• Family Pension: In case of an employee’s demise, their family will receive an assured pension equal to 60% of the employee’s pension before their demise.
• Inflation Indexation: The UPS applies inflation indexation to the assured pension, assured family pension, and assured minimum pension. In the form of Dearness Relief (DR) based on All India Consumer Price Index for Industrial Workers (AICPI-IW), similar to employees in service.

• Lump Sum Payment: In addition to gratuity, 1/10th of monthly salary (Basic + DA) for every completed six months of service. Notably this payment will not affect the assured monthly pension amount.

• Financial Contributions: Employees choosing the UPS will continue to contribute 10% of their salary. The government’s contribution will be increased from 14% to 18.5%.
• Under the UPS, the pension corpus will be divided into two funds: An individual pension fund, where the employee’s contribution of 10% of basic pay and dearness allowance and the matching Government contribution @ 10% will be credited. Out of the Government contribution of 18.5% a separate pooled corpus for 8.5% Government contribution of all the employees will be created.

How the UPS Scheme Works?

Employees can choose how to invest their individual pension corpus, but the assured pension will be based on a ‘default mode’ investment pattern as notified by the Pension Fund Regulatory and Development Authority (PFRDA), considering full annuitizations of individual pension corpus. Employee can withdraw up to 60% of their individual pension corpus, which will reduce their assured pension proportionately.

If the employee’s chosen investment generates an annuity higher than the assured amount, they will receive the higher pay-out. Conversely, if the investment yields a lower annuity, the government will make up the difference, but only up to the benchmark annuity level.

Advantages and Disadvantages of Unified Pension Scheme (UPS)

SL	Advantage	Disadvantage
1	Assured Pension: UPS provides a fixed, assured pension amount, unlike the market-linked returns of the NPS.	Inequitable Benefits: The scheme primarily benefits a small section of the workforce, the Central Government employees. While the NPS was voluntary for the workforce in the unorganized sector, there are no such provisions in the UPS.
2.	Benefit of Inflation Indexation: Pension amount is linked with increase in dearness relief (DR) to take care of inflation.	Increased Fiscal Burden: The introduction of a defined pension could significantly increase the financial burden on the Government.
3.	Higher Contribution by the Government: The increased contribution to 18.50% from 14% can significantly boost the pension corpus to take care of assured pension.	Transition from NPS: This transition raises questions about the management of the existing NPS corpus and the potential for reduced participation in the NPS.
4.	Assured Family Pension:  This will be 60% of pension of the employee immediately before her/his demise.	Potential for Unsustainable Liabilities: As the UPS combines features of both the OPS and NPS there is concern that it may lead to unsustainable liabilities for the Government and restrict spending on other essential services.

Comparative Analysis Among OPS, NPS and UPS

SL	Features	OPS	NPS	UPS
1.	Eligible employees	Only Government employees	Government employees, Individual citizens between   18 to 70 years and NRI	Only Government employees
2.	Basis of Pension Amount	On the basis of last drawn salary of employee (Basic + DA)	Based on the accumulation made in the corpus during the period of service	On the basis of the average last drawn salary (Basic +DA) of 12 months before retirement.
3.	Quantum of Pension Amount after Retirement	50% of last drawn salary (Basic + DA)	There is no defined pension. This is Market-linked pension and the pension amount depends upon the performance of the selected investment funds.	Guaranteed pension of 50% of the average last drawn salary (Basic + DA) of 12 months before retirement.
4.	Inflation Indexation	Adjusted for inflation through Dearness Allowance (DA).	Not applicable as the pension amount is market linked.	Pension is Indexed for Inflation based on the All-India Consumer Price Index for Industrial Workers (AICPI-IW)
5.	Employee Contribution	No contribution from employee.	Defined contribution of 10% of basic pay and dearness allowance (DA).	Defined contribution of 10% of basic pay and dearness allowance (DA).
6.	Government Contribution	Full Funding by Government	Defined contribution of 14% of the employee’s basic pay and dearness allowance.	Defined contribution of 18.5% of the employee’s basic pay and dearness allowance.
7.	Pension to family member on the death of employee	Yes, it is available. But different formula of pension amount for death during service and death after service	Corpus Dependent	It is 60% of employee’s pension after death after retirement.  Family pension before retirement of employee yet to be cleared by the Government.
8.	Risk in the Pension	No market risk	Market risk	Lower risk than NPS
9.	Availability of Gratuity	Yes	Yes	Yes
10.	Onetime Benefit on retirement other than Gratuity	No	No	In addition to gratuity, 1/10th of monthly salary (Basic +DA) for every completed 6 months of service. This will not affect the assured monthly pension amount.
11.	Minimum Pension	Rs. 9,000 + increase in DA every 6 months	No Minimum Pension Prescribed	Rs.10,000 + increase in DA every 6 months
12.	Income Tax Benefit	There is no tax benefit as there is no employee and employer contribution, but the pension amount is tax-free.	Employees can claim various tax benefits at the time of investment and pension amount out of 40% of annuity is taxable.	It is expected that the Tax benefit for the employee and employer contribution will remain continue as in case of NPS. But taxation of pension and one-time benefit is yet to be cleared by the Government.

How to Decide Which scheme is Better i.e. NPS or UPS?

The UPS provides a fixed amount of pension every month for Government employees. But the pension from NPS is dependent on the market fluctuations. Therefore, taking decision as to which scheme will be better, it is difficult because the decision is based on the number of factors such as age of employee at joining,  retirement age ,length of Service, annual increase in salary (on account of Increment, Increase in DA, Number of Promotions during the lifetime of service), choice of investment plan in NPS and Expected Return on Investment in NPS etc.

To understand the above, an illustration is presented below to know the approx. amount of pension that may be available under both the schemes. The calculations are based on certain assumptions.

Conclusions

One more important factor to be kept in mind while taking decision is availability of Inflation Linked Pension under UPS for every 6 Month, however the same is not available under NPS scheme.

Above Calculations as given in the illustration are based on the assumptions only. Actual calculation and decision will differ based on number of other factors such as age of employee at the time of joining, retirement age, Lenth of Service, Annual Increase in salary (on account of Increment. Increase in DA, Number of Promotions). Choice of Investment plan in NPS and Expected Return on Investment in NPS etc. Therefore, before taking decision by the individual about the choice of scheme the above-mentioned factors need to be taken in consideration for a correct picture.

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Author is working in a Maharatna PSU and can be reached at [email protected]

Disclaimer: The views expressed in this article is solely of the author and in no way, it can be considered as the views of management or organization.