Tax clarity for govt staff, DFS releases FAQs on Unified Pension Scheme

The FAQs confirm that the tax incentives applicable to the National Pension System will also extend to UPS, providing certainty to government employees under the new framework

The Department of Financial Services (DFS) on Tuesday issued a detailed set of Frequently Asked Questions (FAQs) clarifying the tax treatment of contributions and withdrawals under the Unified Pension Scheme (UPS).

 

The release confirms that the tax incentives applicable to the National Pension System (NPS) will also extend to UPS, providing certainty to government employees under the new framework.

 

According to the FAQs, the central government’s contribution of 10 per cent of monthly emoluments— basic pay plus dearness allowance— to an employee’s individual corpus under UPS will be eligible for deduction under Section 80CCD(2) of the Income Tax Act, 1961.

 

Similarly, an employee’s own contribution of up to 10 per cent of emoluments qualifies for deduction under Section 80CCD(1). The government also makes an additional 8.5 per cent contribution to the pool corpus at an aggregate level, which is not considered as income in the hands of the employee and is not taxable either as salary or as a perquisite.

 

The FAQs further state that partial withdrawals of up to 25 per cent of an employee’s own contribution from the individual corpus will be exempt from income tax under Section 10(128). At the time of retirement or superannuation, transfers from the individual corpus to the pool corpus will not be treated as income and will remain tax-free under Section 80CCD(6).

 

Employees will also have the option to withdraw up to 60 per cent of their individual or benchmark corpus, whichever is lower, at retirement, which will be exempt under Section 10(12AA). The remaining 40 per cent is to be mandatorily transferred to the pool corpus and is not chargeable to tax.

 

In addition, lumpsum payments at retirement, calculated as 10 per cent of monthly emoluments for every completed six months of qualifying service, will be fully exempt under Section 10(12AB). In cases where the individual corpus exceeds the benchmark corpus, 60 per cent of the excess will be exempt, while the balance 40 per cent will be taxable as part of salary income.

 

The department has clarified that monthly payouts received by retired employees under UPS will be treated as pension and taxed under the head “Salaries”. In the case of the death of a subscriber, family pension received by the spouse will be taxed under “Income from other sources.”

 

Through these clarifications, DFS has confirmed that UPS enjoys the same tax benefits as NPS, aligning the new scheme with the existing pension framework while providing tax certainty for government employees.