As the September 30 deadline approaches, central government employees face a pivotal decision: whether to remain in the New Pension System (NPS) or opt for the newly introduced Unified Pension Scheme (UPS).
The choice carries long-term implications for retirement security, income stability, and financial planning.
With both schemes now offering comparable tax benefits, the decision hinges on individual risk appetite, career stage, and retirement goals.
The government has extended the deadline to September 30, 2025, for eligible central government employees to opt into UPS.
Migration can be done online via the eNPS portal, or offline using Form A2. Once submitted, the choice is final and irreversible.
Understanding the Two Pension Schemes
The New Pension System (NPS), introduced in 2004, is a market-linked defined contribution plan.
It allows employees to invest in equity and debt instruments, with returns dependent on market performance.
At retirement, subscribers can withdraw 60% of the corpus tax-free and must use the remaining 40% to purchase an annuity.
The Unified Pension Scheme (UPS), operational since April 1, 2025, is a hybrid model.
It retains the defined contribution structure but guarantees a minimum monthly pension, indexed to inflation.
The scheme is designed to offer predictability and stability, especially for employees nearing retirement.
Pension Contribution and Benefit Structure
Under NPS, both employee and employer contribute 10% and 14% of basic pay plus dearness allowance (DA), respectively.
The corpus grows based on investment returns, which can vary significantly depending on market conditions.
In contrast, UPS maintains the same 10% employee contribution but increases the government’s share to 18.5%.
Of this, 10% goes to the individual corpus, while 8.5% is directed to a pooled fund that supports the guaranteed pension.
UPS assures a monthly pension equal to 50% of the average basic pay over the last 12 months, provided the employee has completed 25 years of service.
Those with 10–25 years receive proportionate benefits, with a minimum pension of ₹10,000 per month.
Tax Treatment and Regulatory Clarity
A major concern with UPS was the lack of clarity on tax benefits, which previously discouraged adoption.
However, the Finance Ministry has confirmed that tax deductions under Sections 80CCD(1), 80CCD(1B), and 80CCD(2)—available under NPS—will now apply mutatis mutandis to UPS.
This ensures parity and removes a key barrier for employees considering the switch.
Under the old tax regime, employees can claim deductions up to ₹1.5 lakh under Section 80C, ₹50,000 under 80CCD(1B), and up to 14% of basic + DA under 80CCD(2) for employer contributions.
UPS subscribers are now eligible for similar deductions, potentially including the full 18.5% employer contribution, though further clarification is awaited.
Risk Profile and Investment Flexibility
NPS offers greater investment flexibility, allowing up to 75% allocation to equities. This suits younger employees who can tolerate market volatility and benefit from long-term compounding.
However, the scheme carries market and longevity risks, and final pension amounts are uncertain.
UPS, on the other hand, limits equity exposure to 50% and emphasizes low-risk government securities.
It appeals to employees seeking predictable income, especially those nearing retirement.
The scheme also includes inflation protection through DA-linked adjustments and family pension benefits.
Who Should Choose What?
- Employees under 35: NPS is generally more suitable due to the long investment horizon and potential for higher returns.
- Mid-career professionals (35–50): The choice depends on risk appetite. NPS offers growth, while UPS provides stability.
- Employees above 50: UPS is recommended for its guaranteed pension and protection against market downturns.
Calculations using the NPS Trust calculator show that at 10% returns, NPS may outperform UPS for younger employees.
However, if returns fall below 8–9%, UPS becomes more attractive.
Note: We are also on WhatsApp, LinkedIn, Google News, and YouTube, to get the latest news updates. Subscribe to our Channels. WhatsApp– Click Here, Google News– Click Here, YouTube – Click Here, and LinkedIn– Click Here.
