The Union Cabinet's approval of the Unified Pension Scheme (UPS), set to launch on April 1, 2025, marks a significant transformation in pension policy for government employees, blending features from both the Old Pension Scheme (OPS) and the New Pension Scheme (NPS). This new scheme aims to address the shortcomings of its predecessors by offering a blend of stability and flexibility.
Under the UPS, retirees with at least 25 years of service will receive a pension equal to 50% of their average basic pay over the last 12 months before retirement. For those with fewer years of service, the pension amount will be calculated proportionately, provided they have a minimum of 10 years of service. The scheme also guarantees a minimum pension of Rs 10,000 per month for retirees with at least 10 years of service. Additionally, the UPS includes inflation protection based on the All India Consumer Price Index for Industrial Workers (AICPI-IW), ensuring that pension amounts adjust according to changes in the cost of living. In the event of the retiree’s death, their family will receive an assured family pension of 60% of the retiree’s pension amount, providing continued support.
The introduction of the UPS comes in response to dissatisfaction with the NPS and the reversion to the OPS by several states. Understanding the differences between OPS, NPS, and UPS is crucial for navigating the evolving pension landscape.
The OPS guarantees government employees, both at the central and state levels, a pension equivalent to 50% of their last drawn basic pay upon retirement. This pension is further adjusted with Dearness Allowance (DA), which compensates for rising living costs by increasing the pension amount whenever DA rates are revised for current employees. OPS also includes a General Provident Fund (GPF), where employees contribute a portion of their salary, which is returned with interest at retirement, and a gratuity payment of up to Rs 20 lakh. This scheme is financed directly from the government's treasury, ensuring ongoing pension payments. In the event of the retiree's death, their family continues to receive pension benefits. Despite its stability, OPS became financially unsustainable due to rising life expectancies and increasing government liabilities. By 2020-21, pension liabilities for both central and state governments had escalated, rendering the OPS an unfeasible long-term model.
Launched in January 2004, the NPS was initially designed for government employees but was later extended to all sectors. Regulated by the Pension Fund Regulatory and Development Authority (PFRDA), the NPS is a voluntary investment plan for retirement savings. It offers both a pension and the potential for substantial investment growth. Subscribers can withdraw a portion of their accumulated savings upon retirement, while the remaining balance is used to provide a monthly pension. The NPS includes two tiers: Tier 1 accounts, which restrict withdrawals until retirement, and Tier 2 accounts, which allow more flexibility with early withdrawals. Upon retirement, individuals can withdraw 60% of their accumulated corpus tax-free, while the remaining 40% must be used to purchase an annuity that provides a monthly pension, generally around 35% of their final salary. The NPS also offers tax benefits under Section 80 CCD of the Income Tax Act, allowing tax-deductible contributions up to Rs 1.5 lakh. However, the NPS faced criticism for its lack of guaranteed returns and mandatory employee contributions, with pension payouts varying significantly due to its market-linked nature and tax implications.
The UPS combines desirable features from both OPS and NPS, providing a more stable and predictable retirement income. It offers an assured pension with inflation protection and a family pension, addressing key criticisms of the NPS while maintaining the financial sustainability that OPS lacked. This new scheme ensures retirees have a reliable and steady income, incorporating elements from both OPS and NPS to create a more balanced and secure retirement plan. Government employees currently under the NPS will have the option to transition to the UPS, with the added benefit of receiving arrears with interest, making it a financially attractive choice. Overall, the UPS is designed to provide a more predictable and secure retirement plan, addressing the limitations of both OPS and NPS while offering enhanced benefits and stability.
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