NPS vs UPS: Big move for central government employees! NPS tax benefits now available under UPS - here’s what it means

In a significant move aimed at strengthening the Unified Pension Scheme (UPS), the Finance Ministry has extended income tax benefits currently available under the National Pension System (NPS) to the newly introduced UPS. A government release said, “In a bid to provide further impetus to the UPS, the Government has decided that tax benefits as available under NPS shall apply mutatis mutandis to UPS as it is an option under NPS. These provisions ensure parity with the existing NPS structure and provide substantial tax relief and incentives to employees opting for the Unified Pension Scheme.”The government’s decision is expected to address the primary concern that had dampened interest in the UPS — lack of clarity on tax treatment.

UPS, which became operational on April 1, 2025, is a guaranteed pension model for central government employees that operates within the broader NPS framework.Tax benefits under NPS: Old vs New regimesUnder the old tax regime, central government employees enjoy deductions under three provisions:

Under the new tax regime, deductions are restricted to Section 80CCD(2), where a government employee can claim up to 14% of basic pay + DA as deduction for employer’s contribution.

There is no deduction for the employee’s contribution under this regime, according to an ET report.With the extension of the same framework to UPS, employees choosing the new scheme can expect equivalent tax savings.Key expert views on UPS tax deductionsNaveen Wadhwa, Chartered Accountant and Vice President at Taxmann.com, told ET, that those choosing the old tax regime will continue to avail deductions under Section 80CCD(1) and Section 80CCD(1B).

However, further clarification is required regarding the maximum deduction limit under Section 80CCD(2). The uncertainty stems from the fact that whilst Section 80CCD(2) permits a maximum deduction of 14% of basic salary plus DA under both tax regimes, the government's contribution towards UPS stands at 18.5%, which exceeds the NPS contribution rate, he said.Ashish Niraj, Chartered Accountant and Partner at A S N & Company, noted: “One of the main reasons for the low choice of UPS was the uncertainty regarding the taxation of UPS.

Now that the government has clarified that tax benefits will apply mutatis mutandis, people will get clarity. Earlier, NPS subscribers were eligible for tax deduction up to 14% of salary (Basic + DA) contributed by the employer under Section 80CCD(2) under both the tax regimes over the limit of Rs 1.50 lakh provided under Section 80C and Rs 50,000 under Section 80CCD(1B).

Now, as the government contribution is 18.5% in the case of UPS, so in my view, UPS subscribers will get 18.5% deduction under 80CCD(2) if they are government employees.”Contribution structure and assured benefits under UPSAs per the government’s FAQs, both the employee and the Central Government will contribute 10% each of basic pay plus DA to the individual corpus. Additionally, the government will contribute another 8.5% to a pooled fund, intended to support the guaranteed pension benefits for UPS subscribers.UPS guarantees a monthly pension payout equal to 50% of the average of the last 12 months’ basic pay, provided the employee has completed 25 years of qualifying service.

Those with at least 10 years of service are entitled to a minimum assured payout of Rs 10,000 per month, subject to regular and timely contributions.Deadline extended for opting inThe Finance Ministry has also extended the deadline for central government employees to switch from NPS to UPS from June 30, 2025, to September 30, 2025. This extension offers employees more time to assess the viability of the new scheme in light of the clarified tax treatment.This policy alignment is likely to increase traction for the UPS, especially with the potential for full tax deduction on the 18.5% employer contribution — a feature that could tilt the decision in favour of those seeking assured post-retirement benefits.