The newest pension scheme for the government employees — Unified Pension Scheme’s primary objective is to consolidate various pension systems existing in the country into a unified framework. The initiative serves as a clear demonstration of PM Narendra Modi’s steadfast dedication to driving reform efforts that promote sustainable fiscal practices and safeguard the welfare of retired individuals nationwide. The scheme guarantees a fixed pension, and it is expected to positively impact approximately 23 lakh central government employees.
The new scheme, which is designed to be accessible to existing participants of the New Pension Scheme (NPS), will encompass retired individuals as well. This adjustment is slated to commence on April 1, 2025. In the context of UPS, the governmental allocation will witness an elevation to 18.5% of the worker’s core wage and dearness allowance (DA), as opposed to the existing 14% allocated under NPS.
The creation of the UPS stemmed from significant dissatisfaction among employees regarding reduced corpus and returns associated with the National Pension System (NPS), along with the removal of the Old Pension Scheme (OPS).
UPS taxation
Details on the taxation of Universal Pension Scheme (UPS) are still awaited. It is expected that pension income under UPS will be subject to income tax. The treatment of lump-sum payments is also unclear at this time. The UPS also includes a provision for a lump sum payment based on service length, but the tax treatment of this payment remains unclear.
Under the National Pension System (NPS), pensioners receive 60% of their accumulated corpus as a tax-free lump sum at retirement. The remaining 40% is invested in an annuity, providing a monthly pension subject to income tax.
While equities have historically outperformed other investments over the long term, NPS subscribers can only invest up to 15% of their corpus in equities.
Since no employee contribution was made to the OPS, there were no tax benefits accessible.
Calculations of UPS
1. Under the UPS, the assured pension will be the average basic salary + DA drawn in the previous 12 months before superannuation. This would mean that government employees, at retirement, will get 50% of the average of the last 12 months’ salary + DA.
2. Under the Uniform Pension Scheme (UPS), an employee is mandated to contribute to the pension fund. This requirement mirrors an employee’s contribution to the National Pension System (NPS). As outlined in a report by The Times of India, employees are expected to allocate 10% of their basic pay and dearness allowance towards the UPS. Additionally, the government’s share in the UPS contributions is set to rise from the current 14% contributed to the NPS to 18.5%.
3. UPS will assure a pension payment amounting to 50% of the average basic pay received during the final 12 months before retirement.
4. Individuals with a tenure of 25 years will be entitled to the full pension amount, while those with a minimum of 10 years of service will receive a proportionate pension with a guaranteed minimum of Rs 10,000.
5. The family pension to the spouse pegged at 60% of the deceased government employee’s pension.
6. The Unified pension scheme offers lump sum payment at the time of superannuation. The lumpsum payment will be calculated as 1/10th of monthly emoluments (Pay + DA) as on the date of superannuation for every six months of service completed. This payment will not reduce the quantum of assured pension, as per the government’s press release.
7. The Lumpsum payment is determined using the Commutation Table. The monthly pension amount will be decreased by the commuted portion, which will be reinstated after 15 years from the date of receiving the commuted pension value. Dearness Relief will be calculated based on the original pension amount, without taking into account the reduction from the commuted portion.
The formula for arriving for commuted value of Pension (CVP) is: CVP = 40 % (X) Commutation factor* (X) 12.
8. Ashwini Vaishnaw, Minister of Information and Broadcasting of India, noted: “Upon 30 years of service, approximately six months’ worth of pay will be disbursed as a lump sum upon retirement,” and clarified that this payment is separate from gratuity.