The Centre on Friday extended the income tax benefits available under the market-linked national pension system (NPS) to the new guaranteed unified pension scheme (UPS). The move is expected to give an impetus to the UPS, which hasn’t gained much traction among government employees yet.
“The government has decided that tax benefits as available under NPS shall apply to UPS as it is an option under NPS,” the finance ministry said.
These provisions would ensure parity with the existing NPS structure and provide substantial tax relief and incentives to employees opting for the UPS.
According to the current norms, tax-free withdrawal of a maximum of 60% of the NPS corpus accumulated during a person’s working years is allowed on retirement. The subscriber has to invest a minimum of 40% of the corpus in annuities for a regular pension, which is not guaranteed. Under the UPS too, tax waiver is available for withdrawal of up to 60% of the corpus on superannuation, but only with a proportionate reduction in the guaranteed pension.
The UPS provides an assured pension of 50% of the last drawn salary (average basic pay of the last 12 months of service) upon superannuation for all employees completing a minimum of 25 years of service, with the value of such deferred compensation fully indexed to inflation.
Under NPS, tax exemption is available for withdrawals up to 25% of the self-contribution during service. With the latest decision, this can now be availed under UPS also to meet exigencies.
Those under the old income tax regime can now claim tax deduction up to Rs 50,000 under section 80 CCD(1B) over and above the overall ceiling of Rs 1.5 lakh under Sec 80 CCE. Similarly, old tax regime also allows claim up to 20% of pay (employer share 10% and employee share 10%) as tax deduction under section 80 CCD subject to overall ceiling of Rs 1.5 lakh under section 80CCE.
Under new tax regime, one can claim only employer’s (government’s) contribution of 14% of pay as tax deduction for NPS. This facility too has now been extended to the UPS.
Under UPS, the employee contribution is 10% (of basic pay + DA). The government’s contribution has been raised from the present 14% (under the market-linked NPS) to 18.5%.
In the past one month, the government has extended several benefits to staff switching to UPS from NPS including extending benefits of the old pension scheme in the event of death of government employees or his discharge from service on account of invalidation or disablement. The Centre has also extended the benefit of retirement gratuity and death gratuity to staff under UPS.
Of the 2.7 million central government employees enrolled under NPS, just around 1% have switched to UPS so far. This has forced the government to extend the deadline for switching to UPS by three months till September 30, 2025.
The government staff are seeking redressal of grievances, including immediate pension for central paramilitary force personnel who retire early and the return of pension corpus for staff quitting service before completing 10 years of mandatory service for pension, sources said.