Central govt employees opting for UPS to get NPS tax perks: Details

Unified Pension Scheme mirrors National Pension System's tax benefits; employees have time till Sept 30 to make switch

Central government employees will continue getting tax benefits if they shift to the Unified Pension Scheme (UPS), said a press statement on Wednesday.

 

Employees have time till September 30 to shift to UPS from the National Pension System (NPS). To assist them, the Department of Financial Services (DFS) has released frequently asked questions (FAQs) about how contributions, withdrawals and payouts under UPS will be treated for taxes.

What is UPS

People who joined the central government on April 1 and later are served under UPS, which was notified in January. Employees under NPS and retirees have the option to move to UPS before September 30.

 

 

UPS provides a mix of market-linked growth and predictable pension payouts. The Pension Fund Regulatory and Development Authority (PFRDA) issued regulations for it in March.

Tax treatment of contributions

Both employee and employer contributions to UPS attract similar deductions as under NPS:

 

1. Employee contributions: Up to 10 per cent of basic pay and dearness allowance (DA) are deductible under Section 80 CCD (1).

 

2. Government contributions to individual corpus: 10 per cent of basic pay plus DA is deductible under Section 80 CCD (2).

 

3. Additional pool contribution: The Centre will also put 8.5 per cent of emoluments into a pooled corpus. This amount is not treated as salary and it is not taxable.

 

Withdrawals and retirement benefits

The FAQs clarify several key points for employees approaching retirement:

 

Partial withdrawals: Up to 25 per cent of an employee’s own contribution can be withdrawn tax-free.

 

Lump-sum benefit: On retirement, employees receive a lump sum equal to 10 per cent of basic pay plus DA for every six months of service. This is fully exempt from tax.

 

Corpus withdrawals: Employees can withdraw up to 60 per cent of the individual corpus or the benchmark corpus (whichever is lower). This portion is tax-free. The balance 40 per cent must be transferred to the pool corpus, which is not taxable.

 

Excess corpus: If the individual corpus exceeds the benchmark corpus, 60 per cent of the excess is exempt. The remaining 40 per cent is taxable as salary.

 

Taxation of payouts

Monthly pension payouts are treated as salary and taxed accordingly.

 

Family pension payouts, received by a deceased employee’s spouse, are taxable as income from other sources.

 

The FAQs provide clarity to government employees making a once-in-a-career decision. With tax treatment now aligned to NPS, the choice boils down to the structural differences between the two schemes: UPS promises greater stability, while NPS offers more flexibility and market exposure.

 

Employees are advised to review the DFS FAQs carefully and consider professional advice before opting in, as the choice will shape retirement income for decades.