Amid growing dissatisfaction among government employees with the National Pension Scheme (NPS) and increasing pressure from various states to return to the Old Pension Scheme (OPS), Prime Minister Narendra Modi-led Union Govt on Auust 24 approved the Unified Pension Scheme (UPS).
Who will benefit from UPS?
The Union Cabinet has approved the Unified Pension Scheme (UPS) for government employees, potentially benefiting 23 lakh central employees, with the number possibly rising to 90 lakh if state governments adopt the framework. The UPS will be implemented from April 1, 2025, and will provide an assured pension equal to 50% of the average basic pay from the last 12 months before retirement.
What is Unified Pension Scheme (UPS)?
UPS guarantees a pension of 50% of the average basic pay from the last 12 months, with adjustments for shorter service periods. It includes a family pension at 60% of the retiree’s pension, a minimum pension of ₹10,000 for those with at least 10 years of service, and inflation adjustments. The system also provides Dearness Relief based on the All India Consumer Price Index and a lump sum payment upon retirement, which does not impact the guaranteed pension.
Key features of Unified Pension System (UPS)
Assured Pension: Provides 50% of the average basic pay earned over the last 12 months before retirement, based on a minimum qualifying service of 25 years. For shorter service periods, the pension is prorated, with a minimum requirement of 10 years of service.
Assured Family Pension: Set at 60% of the employee’s pension immediately before their death.
Assured Minimum Pension: Guaranteed at ₹10,000 per month upon retirement, provided the employee has completed at least 10 years of service.
Inflation Indexation: Applies to the assured pension, family pension, and minimum pension, ensuring adjustments for inflation.
Dearness Relief: Calculated based on the All India Consumer Price Index for Industrial Workers (AICPI-IW), similar to the system for service employees.
Lump Sum Payment at Retirement: In addition to gratuity, a lump sum payment equal to 1/10th of the monthly emoluments (basic pay + DA) as of the retirement date is provided for every completed six months of service. This lump sum payment will not affect the amount of the assured pension.
National Pension System (NPS)
National Pension System (NPS) is a defined contribution pension scheme introduced by the Government of India. It is designed to provide a sustainable pension option for citizens and is open to all Indian residents.
Benefits of NPS
Portability: NPS accounts are portable, meaning they can be maintained even if the contributor changes jobs or moves across different states.
Tax Benefits: Contributions to NPS are eligible for tax deductions under various sections of the Income Tax Act in India, offering significant tax benefits.
Flexibility: Contributors can choose their investment options and fund managers, giving them some control over their retirement savings.
Low Cost: The NPS has relatively low management fees compared to some other pension schemes, which can result in higher returns over time.
Old Pension Scheme (OPS)
Old Pension Scheme (OPS) refers to the traditional defined benefit pension scheme that was in place before the introduction of newer schemes like NPS. In India, this was the pension system for government employees before the shift to NPS.
Benefits of OPS
Guaranteed Pensions: OPS provides a fixed pension amount based on the employee’s last drawn salary and years of service, offering financial stability in retirement.
Security: It is a defined benefit scheme, meaning that the pension amount is predetermined and not subject to market fluctuations.
OPS vs NPS vs UPS
OPS offers a fixed, guaranteed pension based on final salary, providing predictable retirement income but can be financially demanding.
NPS is a defined contribution plan with variable returns based on investment performance, offering portability and tax benefits but with investment risk.
UPS aims to integrate multiple pension schemes into a single framework, providing a balanced approach with assured benefits and inflation adjustments while simplifying administration.
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