The Union Cabinet has approved the Unified Pension Scheme (UPS), which will provide assured pension to government employees after retirement.The scheme will be effective from April 1, 2025, when central government employees migrate from the current National Pension System (NPS) to UPS.State governments will also have the option to adopt the Unified Pension Scheme.
What are the provisions of the Unified Pension Scheme
- Assured pension: It will be 50% of the employee’s average basic pay in the last 12 months before retirement for a minimum qualifying service of 25 years. This amount will reduce proportionately for shorter service periods up to a minimum of 10 years.
- Assured minimum pension: UPS provides an assured minimum pension of Rs 10,000 per month in case of retirement after a minimum of 10 years of service.
- Assured family pension: On the death of the retired person, his immediate family will be eligible to receive 60% of the pension last drawn by the retired person.
- Inflation Indexation: Dearness relief will be available on all the three types of pensions mentioned above. Indexation will be calculated on the basis of All India Consumer Price Index for Industrial Workers.
- Lumpsum payment on retirement: In addition to gratuity, employees will receive a lump sum payment on retirement, which will be equal to 1/10th of their monthly salary (pay+DA) as on the date of retirement, on completion of every six months of service. This payment will not affect the amount of assured pension.• Gratuity is an amount paid by the employer to his employees for their services.
- Options for employees: Employees can still choose to remain under NPS. However, an employee can opt only once. Once opted, the option cannot be changed.
Main Differences between UPS, Old Pension Scheme (OPS) and National Pension Scheme (NPS)
- Pension Calculation Method: In OPS, pension was fixed at 50% of the last Basic Pay and Dearness Allowance (DA).
- In UPS, pension is calculated as 50% of the average of Basic Pay and DA drawn in the last year before retirement. This adjustment means that if an employee gets a promotion shortly before retirement, he will get a slightly lower pension.
- Employee Contribution: No employee contribution was required in OPS. In UPS, employee contribution is 10% of Basic Pay and DA and the government will also contribute 18.5%. NPS requires a contribution of 10% from the basic pay of a Central Government employee and 14% from the government.
- Tax Benefits: Central Government employees are eligible for tax benefits for the government contribution to the NPS scheme. They can claim a deduction of 14% from both the old and new tax regimes under the Income Tax Act, 1961. Since there was no employee contribution to OPS, they cannot avail tax benefits. The government has not yet clarified whether employee and government contributions under UPS will get any tax benefits.
- Higher minimum pension in UPS: The minimum pension at the time of retirement after a minimum service of 10 years under the UPS scheme is Rs 10,000 per month. The current minimum amount is Rs 9,000 after a minimum service period of ten years.
- Lumpsum payment: OPS allowed lump sum payment of up to 40% of the pension, thereby reducing the monthly pension amount. UPS provides a lump sum payment on retirement, which is calculated as one-tenth of the monthly salary plus dearness allowance for every six months of service and has no impact on the pension amount.
National Pension Scheme
- NPS was a market-linked contribution scheme launched by the Central Government to help individuals provide income in the form of pension to meet their retirement needs
- NPS replaced OPS on 1 January 2004 as part of the Government’s commitment to modernise pension regulations in India.
- Pension Fund Regulatory and Development Authority (PFRDA) regulates and administers NPS under the PFRDA Act, 2013.
- Need for NPS: There was a fundamental problem with OPS i.e. it was not funded and there was no dedicated fund for pensions.
- Over time, this led to the Government’s pension liability increasing to financially unsustainable levels.
- The Centre’s pension liabilities increased from Rs 3,272 crore in 1990-91 to Rs 1,90,886 crore in 2020-21.
- Functioning of NPS: NPS differed from OPS in two fundamental ways.
- Firstly, it did away with the provision of assured pension.
- Secondly, it would be funded by the employee himself and the government would also contribute an equal amount.
- The defined contribution included 10% of the basic pay and dearness allowance by the employee and 14% contribution by the government.
- Under NPS, individuals could choose from a number of schemes and pension fund managers as well as private companies to invest their money deposited in NPS.
- Opposition to NPS: Under NPS, government employees got low guaranteed returns and had to contribute to their pension, while in OPS there was no contribution from the employees and the guaranteed returns were high.
- Amidst the ongoing demands for reintroduction of the old pension scheme, the Central Government constituted a committee under the chairmanship of T.V. Somanathan in the year 2023. Based on the recommendations of the committee a new Unified Pension Scheme (UPS) has been introduced.