The Union Cabinet, chaired by Prime Minister Narendra Modi, has approved the Unified Pension Scheme (UPS) for government employees, marking a significant step towards ensuring an assured pension for central government workers. This scheme is expected to benefit 23 lakh central government employees. It will come into effect from 1st April 2025. Central government employees have been given the option to choose between NPS (National Pension Scheme) and UPS.
Here are the salient features and a comparative study of the three pension schemes.
Unified Pension Scheme (UPS)
According to the Union government, the new initiative launched by the NDA government combines the salient features of both the Old Pension Scheme (OPS) and National Pension Scheme (NPS), thus named as Unified Pension Scheme. It will work like the OPS with the added benefits of the NPS.
The UPS introduces various benefits, including the fact that government employees will receive a guaranteed pension amounting to 50 percent of the average basic pay earned during the last 12 months before retirement. To avail this benefit of the UPS, government employees must complete a minimum of 25 years of service.
Government employees who served for at least 10 years will receive a proportional pension. A key feature of the scheme is that government employees will get a guaranteed minimum pension of ₹10,000 per month if they retire after serving for at least 10 years.
Additionally, the scheme includes a provision for the family pension that ensures surviving spouses or family members receive 60% of the employee’s pension immediately after the employee’s death.
The UPS offers flexibility by allowing current and future employees to choose between the NPS and the new scheme, UPS. However, once a choice is made, it is final. Furthermore, state governments can also implement the newly launched UPS initiative and if they adopt the same model, the scheme could potentially cover up to 90 lakh employees.
UPS not only guarantees a pension but also incorporates inflation indexation. The dearness relief component will be based on the All India Consumer Price Index for Industrial Workers (AICPI-IW).
After retirement (superannuation), government employees will also receive a lump sum payment, in addition to gratuity. This lump sum amount will be calculated – as one-tenth of their monthly earnings, which include their salary and dearness allowance – at the time of retirement for every six months of service completed. Importantly, this payment will not affect the amount of the assured pension.
Notably, there will be no increase in the employee contribution under the new scheme. They will contribute 10% of their salary to UPS. Instead, the government will raise its contribution from 14 percent to 18.5 percent to facilitate the implementation of the UPS.
It is however important to note that the UPS does not apply to private employees. They can invest in NPS.
National Pension System (NPS)
The NDA government, led by the then Prime Minister Atal Bihari Vajpayee, implemented the National Pension System (NPS) scheme in 2004. It replaced the Old Pension Scheme (OPS). However, it faced massive opposition.
Under the provisions of NPS, the employee contribution is 10% of their basic salary and DA, while the government contributes 14%. 60% of the pension amount was tax-free which could be withdrawn in a lump sum. The rest of the 40% pension amount attracted tax as per the tax bracket.
The pension received under NPS depends on the employee’s contribution made during the employment period. This amount was linked to the stock market etc., and the amount received from it also depends on the market performance.
Any individual can open an account in NPS. The minimum contribution is Rs 500. There are two types of accounts – Tier-1 account and Tier-2 account. The Tier-1 account is mandatory and it is exempted from tax. Whereas, the Tier-2 account is optional and you can draw funds from it anytime but it doesn’t enjoy the benefit of tax exemption.
After retirement, any employee can withdraw 60% of the total pension amount from NPS as a lump sum accumulated amount. The remaining amount can be used to buy an annuity to pay a regular pension. 60% of this amount is tax exempted.
Old Pension Scheme (OPS)
In the Old Pension Scheme, there was a provision to give monthly pensions based on the last salary of the employees. There was no employee contribution as the government used to bore its expenses. The Atal Bihari Vajpayee’s government replaced it with the NPS. However, there have been frequent calls for the re-implementation of OPS.
OPS applies only to those government employees who have joined the service before 1st January 2004. In OPS, the pension amount also includes changes in Dearness Allowance (DA) from time to time. DA is linked with inflation. The amount received under this scheme is exempted from tax.
After retirement, the employees could withdraw 50% of their last salary as a pension. However, the government has discontinued this scheme.
Nonetheless, another noteworthy provision of UPS is that the scheme applies to central government employees who have already retired and have opted for the NPS. If they opt for UPS instead of NPS, they will receive arrears for the previous period, with interest calculated at Public Provident Fund (PPF) rates. It will cost an outlet of approximately Rs 800 crore to the government.
Which scheme is better among the three
OPS was the best scheme because the employees did not have to make any contribution for pension and the government bore all its expenses. However, some other benefits were added to the NPS.
Now, the Union government has estimated that the UPS will be beneficial for 99 percent of the currently working central employees. In such a situation, it is important to know which is better between NPS and the newly announced pension scheme, UPS.
Under the UPS, employees will get a fixed pension amounting to 50% of the average basic pay earned during the last 12 months before retirement. Whereas, in the NPS, the pension amount depended on the amount invested in the market.
For employees who served for more than 10 years but less than 25 years, their pension amount will be decided based on proportionate allocation of the period, but this system is not available in NPS.
Under the provisions of the UPS, in case of an employee’s death, the dependent will get 60% of the pension amount as an assured family pension.
Furthermore, the minimum pension amount in the UPS is Rs 10,000 per month, whereas there is no such provision in NPS.
Another added advantage of UPS is that it is linked to the inflation indexation. In case the retail inflation rate increases then the pension amount will also increase accordingly. Pension, family pension, and minimum pension will be determined based on Dearness Allowance. Whereas in NPS, the pension amount depends on the market performance.
In this new pension scheme introduced by the Modi government, a lump sum amount worth 10% of the basic salary will be given for every six months during the service period. This will be in addition to gratuity. Additionally, the government contribution to UPS will be 18.5 percent, which is higher than the contribution in NPS which stands at 14%.
