In 2024, the Central Government rolled out Unified Pension Scheme (UPS) to ensure pension security for government employees, giving them a pension that is fixed as a percentage of a guaranteed salary (unlike a pension tied to market returns of NPS).
UPS guarantees pension at the rate of 50% average basic pay plus Dearness Allowance at the end the last year of service for employees with 25 years of Continuous Service. Employees who have completed more than 10 years get not less than Rs 10,000 per month. If the pensioner dies before receiving their pension then the family gets 60% of the last pensioner. Because the pension is indexed to inflation, pensions maintain purchasing power.
NPS is a contributory retirement pay scheme, but does not guarantee returns at time of retirement. It causes uncertainty concerning employees’ retirement income. To combine the NPS deducting system with a defined pension scheme, UPS was introduced to provide employees with a reliable and regular source of income following retirement.
Employees contribute 10% of basic pay plus Dearness Allowance to UPS, which will be matched 1 for 1 by the government. The government also contribute 8.5% to a common fund so guaranteed pensions are supported. This contribution over the 14% government contribution to NPS ensures funds are available for guaranteed payouts.
Despite the merits of Upside Pension Scheme (UPS), almost no employees have switched to UPS. By July 2025, around 31,000 out of 23 lakh members of the New Pension Scheme (NPS) switched to UPS which is only about 1.35%.
The first major issue is not knowing the tax rules on pension withdrawal. The bigger problem is that employees have no choice in where their money is invested through UPS. On the Other hand, with NPS, employees are given multiple options for ‘investment choices’.
Younger employees are also veering towards NPS scheme over UPS scheme because they feel that the market risk is worth taking since they have 30-35 years to retire. UPS also offers a smaller lump sum payments, which may prevent employees from being interested in switching to UPS.
In addition to that, employees in government service for less than 10 years will not receive their UPS incentives. All these reasons add uncertainty and hesitation.
UPS, takes away the market risk but at the same time it takes existing growth opportunities and prohibits employees from exercising control over their investments. Hence, most employees feel that it is a bad trade off, especially at present. In addition to that, it is a matter of personal preferences.
Employees who are seeking certainty would want to go with UPS. And the majority of employees who are looking to generate higher returns would select NPS. Until the government clarifies their tax policy and give employees more options or flexibility, it’s likely the uptake will stay low.
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