Govt extends NPS tax benefits to new Unified Pension Scheme

July 8, 2025 Finance Talk Valli Sarvani

In a move to boost adoption of the Unified Pension Scheme (UPS), the Finance Ministry on July 4, 2025, announced that all tax benefits under the National Pension Scheme (NPS) will now also apply to the UPS.

The decision ensures tax parity between the two schemes and offers substantial financial relief to government employees opting for UPS.

The UPS, launched on April 1, 2025, is the latest retirement scheme for central government employees.

It was introduced following demands to reform the NPS and to bring back features of the old pension scheme (OPS), especially the assured pension element.

The government clarified that since the UPS functions as an option under the NPS, the same tax incentives will apply mutatis mutandis (with necessary adjustments).

Here are the key tax benefits for both NPS and UPS:

For salaried individuals:

Section 80CCD(1): Deduction up to 10% of salary (Basic + DA) under the ₹1.5 lakh Section 80C cap.
Section 80CCD(1B): Additional ₹50,000 deduction – exclusive to NPS/UPS.
Section 80CCD(2): Employer’s contribution up to 10% of salary – fully deductible, with no upper monetary limit.

On withdrawal at retirement (age 60):

60% of the corpus is tax-free.
40% must be used to buy an annuity, which is taxable as pension income.

On partial withdrawals (before 60):

Up to 25% of self-contribution is tax-free if withdrawn for valid reasons (education, medical needs, etc.).

Key Features of UPS:

Assured Pension: 50% of last 12 months’ average basic pay (with minimum 10 years’ service).
Assured Family Pension: 60% of the pension amount is paid immediately after death.
Minimum Pension: ₹10,000/month after 10 years of service.
Indexation: Inflation-linked increase in pension.
Gratuity: Lump-sum payout in addition to pension, without reducing monthly pension.

Employees have until September 30, 2025, to opt for UPS. With added tax relief, the government hopes more will shift to the new system for greater post-retirement security.

Image by Mohamed Hassan from Pxhere (Free for commercial use / CC0 Public Domain)

Image Published on August 05, 2018