Retirement planning: The Unified Pension Scheme (UPS) is a hybrid pension plan that combines elements of defined contribution and defined benefit to provide a reliable income stream for retirees. Initially introduced by the Government on January 24, 2025, as an alternative within the National Pension System (NPS), UPS is scheduled to go into effect on April 1, 2025. The scheme is designed to ensure a steady stream of income for employees post-retirement through the consistent accumulation and investment of contributions from both employees and employers.
Under UPS, subscribers will contribute 10% of their basic pay and dearness allowance on a monthly basis. Additionally, the Central Government will make an additional contribution of approximately 8.5% of basic pay and dearness allowance for all UPS participants, which will be pooled together for collective investment purposes.
The National Pension System (NPS) stands as a prominent tax-saving investment choice in the nation, presenting an array of tax advantages. Apart from tax incentives, NPS also offers various perks.
“By investing in diverse assets such as stocks, government bonds, and corporate debt, NPS assists individuals in building a secure financial future for retirement. NPS enables individuals to enhance their retirement funds by aligning them with their risk tolerance and leveraging tax benefits. It should be noted that NPS does not assure a predetermined pension amount post-retirement,” said CA Suresh Surana.
As individuals contemplate between retirement plans like NPS and UPS, the decision-making process becomes more challenging due to their distinct features and different benefits.
Does NPS have an edge over UPS?
NPS was established to promote retirement savings among individuals, particularly employees. To enhance participation in this scheme, various tax benefits associated with NPS contributions are as follows:
> Employee’s Contribution to Notified Pension Scheme [80CCD(1)]
Contributions made by employees to the NPS are eligible for tax deduction. However, such deduction would be restricted to the following:
10% of salary*, in case of an employee
20% of Gross Total Income in case of self – employed individual.
The above deduction is further subject to the overall threshold limit of Rs. 1,50,000 alongside the deductions available u/s 80C of the IT Act.
> Additional Deduction for pension scheme [80CCD(1B)]
An additional deduction [other than those provided in section 80CCD(1)] of Rs. 50,000 can be claimed by the employee for their own contributions to NPS which is over and above the Rs. 1.5 lakh limit.
> Deduction of Employer’s Contribution to pension scheme. [80CCD(2)]
When an employer, including those from the Central Government or State Government, contributes to any pension scheme, the entire amount contributed is first taxable in the hands of the employee as Salary Income and thereafter it can be claimed as a tax deduction is subject to following limits –
In case of Central Government or State Government employers – 14% of salary*
In case of other employers – 10% of salary*
However, if an employee opts for the new tax regime, the deduction of 14% of salary* will apply uniformly, regardless of the employer type.
> Exemption on Withdrawal from NPS [10(12A), 10(12B) & 10(13)]
Payment received by any taxpayer from NPS Trust on closure of his account or on his opting out of the NPS scheme would be exempt from tax to the extent of 60% of the total amount payable to him at the time of such closure or his opting out of the scheme. Thus, such taxpayer would be liable to pay tax on the balance 40% of the amount received.
In case of partial withdrawal by the employee from the NPS, the exemption would be restricted to 25% (instead of 60%). No such exemption would be available in case of partial withdrawal made by other than employee i.e. self employed taxpayer.
Further, it is pertinent to note that in case of any amount received by any nominee legal heir on the death of the taxpayer, the said amount would be fully exempt u/s 10(13) of the IT Act.
When comparing NPS and UPS, one should also note:
NPS Tax Treatment at Maturity: Upon retirement, 60% of the accumulated corpus can be withdrawn tax-free. The remaining 40% must be used to purchase an annuity, and the income from this annuity is taxable as per the individual’s income tax slab.
UPS Tax Treatment at Maturity: UPS provides a guaranteed pension, which is expected to be taxed as regular income according to the individual’s tax slab. The scheme also includes a lump-sum payment upon retirement, but the tax treatment of this component has not been specified.