Unified Pension Scheme: Tax Benefits Extended to UPS

The Finance Ministry has taken a significant step. They have extended income tax benefits to the Unified Pension Scheme (UPS). These benefits were earlier only available for the National Pension System (NPS).

Government’s Decision on Tax Benefits

The government issued a statement. It said, “To promote the UPS, the Government has decided to extend tax benefits under NPS to UPS. This ensures fairness with the current NPS structure. It also offers significant tax relief and incentives to employees opting for the Unified Pension Scheme.”

This decision tackles a major concern. Many were uncertain about the tax treatment of UPS. UPS began on April 1, 2025. It is a guaranteed pension model for central government employees. It operates within the broader NPS framework.

Tax Benefits Under NPS: Old vs New Regimes

Under the old tax regime, central government employees receive deductions under three provisions:

• Section 80CCD(1): For the employee’s own contribution. It is limited to 10% of basic salary or Rs 1.5 lakh, whichever is lower. This falls within the broader Rs 1.5 lakh limit under Section 80C.
• Section 80CCD(1B): An additional deduction of Rs 50,000 for contributions to the NPS Tier-I account.
• Section 80CCD(2): For the employer’s contribution. It is up to 14% of basic pay plus dearness allowance (DA) for central government employees.

Under the new tax regime, deductions are limited to Section 80CCD(2). Here, a government employee can claim up to 14% of basic pay plus DA as a deduction for the employer’s contribution. There is no deduction for the employee’s contribution under this regime.

With the same framework extended to UPS, employees choosing the new scheme can expect similar tax savings.

Expert Views on UPS Tax Deductions

Naveen Wadhwa, a Chartered Accountant and Vice President at Taxmann.com, told ET that those choosing the old tax regime will continue to get deductions under Section 80CCD(1) and Section 80CCD(1B). However, more clarity is needed on the maximum deduction limit under Section 80CCD(2). The uncertainty arises because while Section 80CCD(2) allows a maximum deduction of 14% of basic salary plus DA under both tax regimes, the government’s contribution towards UPS is 18.5%, which is higher than the NPS contribution rate.

Ashish Niraj, a Chartered Accountant and Partner at A S N & Company, noted: “One of the main reasons for the low interest in UPS was the uncertainty about its taxation. Now that the government has clarified that tax benefits will apply, people will have more clarity. Earlier, NPS subscribers could get a tax deduction up to 14% of salary (Basic + DA) contributed by the employer under Section 80CCD(2) under both tax regimes, over the limit of Rs 1.50 lakh under Section 80C and Rs 50,000 under Section 80CCD(1B). Now, as the government contribution is 18.5% in the case of UPS, UPS subscribers will get an 18.5% deduction under 80CCD(2) if they are government employees.”

Contribution Structure and Assured Benefits Under UPS

According to the government’s FAQs, both the employee and the Central Government will contribute 10% each of basic pay plus DA to the individual corpus. Additionally, the government will contribute another 8.5% to a pooled fund. This fund supports the guaranteed pension benefits for UPS subscribers.

UPS guarantees a monthly pension payout equal to 50% of the average of the last 12 months’ basic pay. This is for employees who have completed 25 years of qualifying service. Those with at least 10 years of service are entitled to a minimum assured payout of Rs 10,000 per month, subject to regular and timely contributions.

Deadline Extended for Opting In

The Finance Ministry has extended the deadline for central government employees to switch from NPS to UPS. The new deadline is September 30, 2025, extended from June 30, 2025. This gives employees more time to assess the new scheme with the clarified tax treatment.

This policy alignment is likely to increase interest in the UPS. Especially with the potential for full tax deduction on the 18.5% employer contribution. This feature could influence those seeking assured post-retirement benefits.