In a significant development for central government employees, the Finance Ministry has officially extended income tax benefits available under the National Pension System (NPS) to the recently introduced Unified Pension Scheme (UPS). This move, announced via a press release dated July 4, 2025, provides parity in tax treatment between both schemes and addresses earlier uncertainties around the tax implications of UPS.
Tax Benefits Now Applicable to UPS
The government stated that the tax incentives offered under NPS will apply mutatis mutandis to UPS, treating UPS as an option within NPS. This ensures that central government employees opting for UPS will receive substantial tax relief, equal to those subscribing to NPS.
Current Tax Benefits under NPS
Under the Old Tax Regime:
- Section 80CCD(1):
- Deduction for employee’s own contribution.
- Limit: 10% of basic salary or Rs. 1.5 lakh (included within Section 80C ceiling).
- Section 80CCD(1B):
- Additional deduction of Rs. 50,000 for contributions to NPS Tier-I, over and above 80C.
- Section 80CCD(2):
- Deduction for employer’s contribution, up to 14% of basic + DA for central government employees.
Under the New Tax Regime:
- Only Section 80CCD(2) is available.
- Deduction: 14% of basic + DA on employer’s contribution.
Extension of Deductions under UPS
According to CA Naveen Wadhwa, Vice President at Taxmann.com, employees shifting to UPS will now be eligible for:
- Section 80CCD(1) and 80CCD(1B) deductions under the old regime.
- Section 80CCD(2) deductions under both tax regimes.
However, clarity is awaited regarding the maximum deduction limit under Section 80CCD(2) in UPS, since the government’s total contribution in UPS is 18.5%, exceeding NPS’s 14%.
Some CAs opined that UPS subscribers should logically be allowed to claim 18.5% deduction under Section 80CCD(2), given that it’s the actual government contribution. This includes:
- 10% employer match to employee contributions.
- 8.5% additional pooled contribution by the government to support assured payouts.
Key Features of Unified Pension Scheme (UPS)
- Operational since: April 1, 2025.
- Payout mechanism: Assured monthly pension based on average last drawn salary.
- Guaranteed payout:
- 50% of last 12-month average basic pay post-retirement for employees with 25+ years of service.
- Proportionate pension for those with less than 25 years.
- Minimum monthly assured pension: Rs. 10,000, after 10+ years of qualifying service, subject to regular contributions.
Deadline Extended to Opt for UPS
The Finance Ministry has extended the last date to opt from NPS to UPS from June 30 to September 30, 2025, giving central government employees more time to evaluate the scheme and make a decision.
Way Forward
With tax parity now ensured, the Unified Pension Scheme stands on equal footing with NPS in terms of fiscal benefits. This clarity is expected to increase employee participation in UPS, especially for those seeking assured post-retirement income backed by government contributions and tax benefits.
