NPS vs UPS Right Pension Scheme for You

March 22, 2025

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Retirement planning is crucial for government employees, especially with the introduction of the Unified Pension Scheme (UPS) from April 1, 2025. Employees now need to decide whether to continue with the National Pension System (NPS) or opt for UPS. Each scheme offers distinct advantages and potential drawbacks. Let’s explore both to help you make an informed choice:

What is National Pension Scheme (NPS)?

The National Pension System (NPS) is a voluntary retirement savings plan launched by the Government of India. It enables people to save for their retirement systematically, so that they are financially secure in their old age. It is governed by the Pension Fund Regulatory and Development Authority (PFRDA) and offers a chance to build wealth for post-retirement income.

Key Features of NPS:

● Employee Contribution: Voluntary contributions with a minimum annual contribution of ₹1,000 to maintain the account.

● Government Contribution: No direct contribution for private sector employees. But for government employees, the employer pays 14% of basic salary + Dearness Allowance (DA).

● Market-Linked Returns: NPS investments are market-linked, like select investments, providing potential for increased returns depending on the choice of investment strategy.

● Annuity & Lump Sum Withdrawal: At retirement age (60 years), a maximum of 60% of the corpus can be withdrawn as a lump sum (tax-free), and 40% is utilized to buy an annuity for a lifetime pension.

● Investment Options: The National Pension System (NPS) offers various investment options, each associated with different asset classes:

Scheme E: Invests primarily in equity and equity-related instruments and best suited for investors with a high-risk appetite.

Return: for an Equity-Tier1 account, last 10 years average return stands at 13.81%.(As of 30 August, 2024)

Scheme C (Corporate Debt): Focuses on fixed income instruments issued by corporates, ideal for those seeking stable returns with moderate risk.

Return: for a Corporate Debt-Tier1 account, last 10 years average return stands at 8.78%.(As of 30 August, 2024)

Scheme G (Government Securities): Usually Government invested in this category for their employees. Invests in government bonds and related securities, catering to conservative investors aiming for safety and stable returns.

Return: for a Government Securities-Tier1 account, last 10 years average return stands at 9.26%.(As of 30 August, 2024)

Scheme A: Allocates funds to alternative investment instruments like Commercial Mortgage-Backed Securities (CMBS), Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (InvITs).

Return: for a Alternative Investment Funds-Tier1 account, last 7 year return stands at 7.5%. (As of 30 August, 2024)

● Tax Relief under NPS: Employee contributions are tax deductible up to 10% of salary (Basic + DA) under Section 80CCD (1), subject to the overall ₹1.5 lakh ceiling under Section 80CCE (applicable only under the old tax regime.)

Employer contributions (in case of salaried employees) are tax deductible up to 14% of salary (Basic + DA) under Section 80CCD (2), limited to ₹7.5 lakh annually (applicable under both the old and new tax regimes.)

Also, there is an additional ₹50,000 deduction under Section 80CCD(1B), above the ₹1.5 lakh cap (applicable only under the old tax regime.)

So, NPS proves to be an efficient tax-retirement savings alternative.

What is the Unified Pension Scheme (UPS)?

UPS is a hybrid pension system combining aspects of the Old Pension Scheme (OPS) and the National Pension System (NPS). It aims to provide financial security while maintaining a contribution-based approach.

However, employees must have completed a minimum of 25 years of service to be eligible for guaranteed pension under UPS. Also, employees with at least 10 years of service are eligible for minimum pension under UPS.

Why Was UPS Introduced?

The UPS was introduced to address concerns regarding the unpredictability of NPS, where returns are market-linked. It ensures a guaranteed pension, providing a middle ground between the defined benefit nature of OPS and the market-linked approach of NPS.

Key Features of UPS:

● Employee Contribution: 10% of basic salary + Dearness Allowance (DA).

● Government Contribution: 18.5% of basic salary + DA (higher than NPS’s 14%).

● Guaranteed Pension: 50% of the employee’s average basic pay from the last 12 months before retirement (minimum 25 years of service required).

● Minimum Pension: ₹10,000 per month (for employees with at least 10 years of service).

● Family Pension: 60% of the last drawn pension after the employee’s death.

● Inflation Protection: Pension payments adjusted as per the All-India Consumer Price Index (CPI).

● Lump Sum Payment: One-tenth of monthly salary (including DA) for every six months of service, in addition to gratuity.

● Irrevocable Choice: Once opted for, the decision between UPS and NPS is final.

NPS vs. UPS: A Comparative Analysis

How to Choose Between NPS and UPS?

Your decision should depend on multiple factors:

● Risk Tolerance: If you prefer guaranteed income, opt for UPS. If you can handle market fluctuations for potentially higher returns, NPS is better.

● Financial Goals: If stability and security are your priorities, UPS is ideal. If growth potential matters more, NPS is preferable.

● Investment Portfolio: If you already have low-risk investments, NPS can provide equity exposure. If your portfolio is equity-heavy, UPS offers balance.

● Years Until Retirement: Younger employees may benefit from NPS due to compounding, while those close to retirement may prefer the security of UPS.

Final Thoughts: Which One Should You Choose?

UPS provides financial security with guaranteed benefits, addressing the unpredictability of NPS. However, NPS offers better growth potential for those comfortable with investment risks.

If you prefer a stable, inflation-protected pension, UPS is a solid choice. If you seek higher returns and can manage market fluctuations, NPS may be more suitable.

Ultimately, the best retirement strategy involves diversification. Instead of relying solely on one pension scheme, consider supplementing your retirement savings with mutual funds, fixed deposits, and other investments to ensure a comfortable post-retirement life.

-Sukalyan Halder & Krishnendu Patra

-Dayco India

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NPS vs UPS Right Pension Scheme for You

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