The Finance Ministry on Friday confirmed that “all tax benefits currently available under the National Pension System (NPS) will also be extended to the newly introduced Unified Pension Scheme (UPS).”
This move is aimed at enhancing the appeal of the UPS for new entrants to the central government civil services, as well as existing NPS subscribers.
The UPS, introduced earlier this year, will be applicable to central government recruits who join on or after April 1, 2025. Existing government employees under the National Pension System (NPS) will also have a one-time option to switch to the new scheme.
As per the Pension Fund Regulatory and Development Authority (PFRDA), which notified the operational guidelines in March, the UPS functions as a defined pension scheme. This means employees are guaranteed a specific pension payout after retirement.
The government contributes 18.5% of an employee’s basic pay and dearness allowance
The employee contributes 10% of their salary
This structure offers a more predictable and secure retirement income compared to the NPS, which operates as a defined contribution scheme without guaranteed returns.
With the Finance Ministry’s new directive, those opting for the UPS will be eligible for the same tax deductions on contributions and incentives as NPS participants.
The Ministry said the move is part of an effort to strengthen retirement planning for central government staff through “transparent, flexible and tax-efficient options.”
The PFRDA will continue to oversee both schemes, ensuring proper governance, transparency, and financial discipline.
Officials anticipate that the extension of tax benefits will motivate more employees to switch from the NPS to the UPS, addressing long-standing concerns about post-retirement income stability.
New recruits after April 1, 2025, will be directly enrolled under the UPS.
Existing NPS subscribers can opt for a one-time switch to UPS.
Employees under UPS will enjoy tax parity with those under NPS.
UPS ensures defined, assured pension unlike market-linked NPS returns.
The Pension Fund Regulatory and Development Authority (PFRDA) is a pivotal institution in India's financial landscape, playing a crucial role in safeguarding the retirement savings of millions of citizens. It acts as the primary regulator for the pension sector, ensuring its orderly growth and the protection of subscriber interests.
The establishment of PFRDA can be traced back to the growing recognition of the need for a sustainable and organized pension system in India, particularly for the vast unorganized sector and new government employees.
OASIS Report (1999): The journey began with the "Old Age Social and Income Security (OASIS)" report commissioned by the Government of India in 1999. This report thoroughly examined policy matters related to old-age income security and provided key recommendations for a new pension architecture.
Interim PFRDA (2003): Based on the OASIS report's recommendations, the Interim Pension Fund Regulatory and Development Authority (Interim PFRDA) was established on August 23, 2003, through a government resolution. Its immediate mandate was to promote, develop, and regulate the pension sector in India on an interim basis.
National Pension System (NPS) Launch (2004): Concurrently, the contributory pension system, now known as the National Pension System (NPS), was notified by the Government of India on December 22, 2003, and came into effect from January 1, 2004. Initially, NPS was mandatory for new entrants to Central Government service (excluding armed forces).
NPS Expansion (2009): The NPS was subsequently extended to all citizens of India, including self-employed professionals and those in the unorganized sector, on a voluntary basis, with effect from May 1, 2009.
PFRDA Act, 2013: To provide statutory backing and permanent legitimacy to the regulatory body, the Pension Fund Regulatory and Development Authority Act, 2013, was passed by the Parliament on September 19, 2013. This Act officially established PFRDA as a statutory body, replacing the interim authority. The Act was notified and came into force on February 1, 2014.
Autonomous Body (FY 2014-15): From the Financial Year 2014-15, PFRDA became a fully autonomous body, functioning independently under the administrative control of the Ministry of Finance, Government of India.
PFRDA is headquartered in New Delhi. The Authority consists of a Chairperson and not more than six members, of whom at least three must be Whole-Time Members. These individuals are appointed by the Central Government, bringing diverse expertise in economics, finance, or law.
The preamble of the PFRDA Act, 2013, clearly outlines its foundational objectives: "to promote old-age income security by establishing, developing and regulating pension funds, to protect the interests of subscribers to schemes of pension funds and for matters connected therewith or incidental thereto."
Its key functions and responsibilities include:
Regulation and Oversight:
Regulating the National Pension System (NPS) and the Atal Pension Yojana (APY), ensuring their smooth operation and adherence to established norms.
Establishing, developing, and regulating pension funds and other associated schemes in the country.
Approving pension schemes and laying down norms and investment guidelines for the management of pension fund corpus.
Registering and regulating various intermediaries within the NPS ecosystem, such as Pension Fund Managers (PFMs), Central Record Keeping Agencies (CRAs), Points of Presence (PoPs), Trustee Bank, and Custodians, to ensure time-bound and efficient service delivery.
Subscriber Protection:
Safeguarding the interests of subscribers to pension funds by ensuring transparency, fairness, and accountability in the pension sector.
Establishing and operating a robust grievance redressal mechanism for pension fund subscribers to address and resolve complaints in a time-bound manner.
Adjudicating disputes between intermediaries and between intermediaries and subscribers.
Market Development and Promotion:
Undertaking steps for educating subscribers and the general public on issues related to pension, retirement savings, and related financial literacy.
Promoting pension schemes not regulated by any other existing enactment.
Ensuring that intermediation and other operational costs within the pension system are economical and reasonable for subscribers.
Promoting the professional organization of procedures connected with the Indian pension system.
Operational Management:
Issuing PRAN (Permanent Retirement Account Number) cards, maintaining the PRAN database, and tracking subscriber transactions.
Ensuring timely allocation and unitization of funds contributed by subscribers to their chosen pension funds.
Receiving and relaying relevant information between subscribers and other intermediaries.
Monitoring and supervising the settlement of invested money and the distribution of units to subscribers.
PFRDA primarily regulates two major pension schemes in India:
National Pension System (NPS): A defined contribution pension system. It offers both Tier-I (non-withdrawable, primary retirement account) and Tier-II (voluntary, withdrawable account) options. It covers Central Government employees, State Government employees, employees of private institutions/organizations, and all citizens of India on a voluntary basis.
Atal Pension Yojana (APY): A government-backed pension scheme aimed at workers in the unorganized sector. It provides a guaranteed minimum pension ranging from ₹1,000 to ₹5,000 per month on attaining 60 years of age, depending on the contribution.
This landmark move by the government aims to offer central government employees a more secure and predictable pension, while retaining tax efficiency. By providing the same tax benefits to the UPS as the NPS, the government seeks to modernize pension options and better safeguard the future of its workforce.