The Indian government has recently approved the Unified Pension Scheme (UPS), a new retirement benefits program for central government employees. Set to be implemented on 1 April 2025, the UPS aims to strike a balance between the Old Pension Scheme (OPS) and the National Pension System (NPS), providing a more secure and stable retirement while addressing fiscal concerns.
Under the UPS, employees with a minimum of 25 years of service will receive a pension equivalent to 50 per cent of their average basic pay drawn over the last 12 months before retirement. For those with 10–25 years of service, the pension will be proportionate to their length of service.
Employees retiring after at least 10 years of service will be entitled to a minimum pension of Rs 10,000 per month. In the event of a retiree's death, their immediate family will be eligible for 60 per cent of the pension last drawn by the retiree.
Dearness relief, calculated based on the All India Consumer Price Index for Industrial Workers, will be available on the assured pension, assured minimum pension, and assured family pension. Additionally, employees will receive a lump-sum payment at retirement equivalent to 1/10th of their monthly emoluments (pay+DA) as of the retirement date for every completed six months of service, which will not affect the amount of the assured pension.
The UPS differs from the OPS and NPS in several key aspects:
| Scheme | Pension Calculation | Employee Contribution | Tax Benefits |
|---|---|---|---|
| OPS | 50% of last base salary + DA | None | No tax benefits available |
| NPS | Market-linked returns | 10% of basic salary + DA | Tax benefits available for government's contribution |
| UPS | 50% of average basic pay + DA in last year before retirement | 10% of basic salary + DA | Tax benefits yet to be clarified |
In the OPS, pension was fixed at 50 per cent of the last base salary plus dearness allowance (DA), while in the NPS, pension returns are market-linked. Under the UPS, pension is calculated as 50 per cent of the average of the basic salary plus DA drawn in the last year before retirement, which means a slightly lower pension if an employee receives a promotion shortly before retiring.
In the OPS, no employee contribution was required, while in the NPS, central government employees contributed 10 per cent of their basic salary and the government contributed 14 per cent. Under the UPS, the employee contribution amount is 10 per cent of the basic pay, and the DA, and the government will also contribute 18.5 per cent.
Central government employees are eligible for tax benefits for the government's contribution to the NPS scheme, but the government has yet to clarify if employee and government contributions are available for any tax benefits under UPS.
While the UPS aims to balance fiscal cost with employee aspirations, there are concerns about its impact on government finances. A Reserve Bank of India study warned that if all states switched to OPS, the fiscal burden could be up to 4.5 times that of NPS, potentially reaching 0.9 per cent of GDP annually by 2060.
However, by combining elements of both OPS (defined benefit) and NPS (contributory), UPS provides a defined return on the pension pool and reduces market risk, potentially mitigating some risks associated with debt burden.
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