From April 1, 2025, all central government employees (except the armed forces) will get the option to choose from two pension schemes — the National Pension System (NPS) and the Unified Pension Scheme (UPS). The NPS, which was launched in January 2004, replaced the Old Pension Scheme (OPS), and covers all departments under the central government. On the other hand, UPS is a new pension scheme recently announced by the government, which will come into effect from April 2025.
NPS vs UPS: Key differences and features
NPS is a market-based investment scheme in which the returns depend on the market condition. In contrast, UPS is a guaranteed pension scheme, which has lower risk due to government protection and the employer (government) contribution is higher than NPS.
Under UPS, the government will contribute 18.5% of the sum of basic salary and dearness allowance (DA), while the employee’s contribution will be 10%, which is the same as NPS.
Pension guarantee:
There is no fixed pension guarantee in NPS, while UPS offers a guaranteed pension based on a percentage of the average basic salary.
Investment options:
Under NPS, one gets the option to invest in equity, debt and other market-linked funds, while UPS invests mainly in government bonds and safe instruments.
Employer contribution:
The government’s contribution in UPS is higher than NPS, which provides a stable pension after retirement.
Risk level:
Investment in NPS is market-linked, which makes it more risky, while UPS is a low-risk scheme, as it offers a fixed pension.
Now the question is, how much investment will have to be made in both the schemes to get a monthly pension of Rs 1 lakh? Let’s understand it in detail.
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UPS: How to ensure Rs 1 lakh pension after 35 years of service
Suppose a person joins a government job on April 1, 2025 at the age of 25 and retires at the age of 60, that is, he served for 35 years.
If the average basic salary of the last 12 months before retirement is Rs 2 lakh per month, then under UPS, guaranteed pension will be available at the rate of 50%, that is, Rs 1 lakh per month.
Apart from this, UPS has a provision to increase the pension every year according to inflation. If we assume an annual increase of 4.5%, then the pension at the age of 61 will be Rs 1,04,500.
NPS: How much investment is required for Rs 1 lakh pension?
If a person starts working at the age of 25 and retires at the age of 60, he will need to invest Rs 16,800 every month (combining 10% employee contribution and 14% government contribution).
Complete calculation:
NPS joining age: 25 years
Monthly contribution (employee + government): Rs 16,800
Expected return on investment: 9%
Total investment: Rs 70.6 lakh
Total return: Rs 4.27 crore
Closing amount: Rs 4.98 crore
40% corpus allocated for pension: Rs 1.99 crore
Expected pension return: 6%
Lumpsum withdrawal (60%): Rs 2.99 crore
Monthly pension: Rs 1 lakh
Why is retirement planning important?
Retirement is an important financial decision. Choosing the right plan can impact your future security. With the arrival of UPS in 2025, the comparison of NPS vs UPS has become even more important. While NPS has the potential to give better returns, UPS guarantees a stable and fixed pension for government employees.
Tax benefits of NPS:
NPS investors get additional tax exemption under Section 80CCD (1B). Under this, an additional deduction of Rs 50,000 can be availed, which is in addition to the Section 80C deduction of Rs 1.5 lakh. Thus, NPS investors can get a tax benefit of up to Rs 2 lakh in total. If someone falls in the 30% tax slab, they can save tax up to Rs 62,400 by investing in NPS.
Now the question is whether UPS will be a better option for government employees, or will NPS remain the right plan for their retirement? There may be more debate on this in the coming days.