In the era of digitalization and growing need of IT sector and MNC’s, with the youth getting attracted more and more towards the corporate sector due to the high paying companies. There is always a question stuck up with what about the old age of these people as there is no such pension option available to them, even in government sector PSU’s have withdrawn the pension scheme after 2010. Before discussing more about UPS, lets know something about UPS and NPS.
UPS Pension Scheme
Unified Pension Scheme (UPS), the Unified pension scheme launched by government has the advantages of the previous old pension scheme and features of the new pension scheme. It has provisions for a fixed pension amount, a guaranteed and predetermined sum of money that a retiree will receive regularly after retirement. The Unified Pension Scheme was approved by the Modi government on August 24 and will take effect on April 1, 2025.
The government asserts that the Unified Pension Scheme combines the advantages of the old pension scheme with the features of the new pension scheme. It includes provisions for a fixed pension amount a guaranteed and predetermined sum that a retiree will receive regularly after retirement.
Features of UPS
- Assured Pension: Retirees will now receive 50% of their average basic pay over the last 12 months before retirement as a pension for a minimum qualifying service of 25 years. Proportionate for lesser service period upto a minimum of 10 years of service.
- Assured Family Pension: In case of a pensioner’s unfortunate demise, their family will receive 60% of the pension the employee was receiving.
- No Increase in Employee Contribution: The Government is increasing its contribution from 14% to 18.5%. Employee contribution will not increase.
- Assured Minimum Pension: Rs10,000 per month as pension, on superannuation after minimum 10 years of service.
Inflation adjusted
- Inflation Protection: Pensions will be indexed to inflation! Dearness Relief will be based on the All India Consumer Price Index for Industrial Workers (AICPI-IW), as in case of serving employees.
- Lump-Sum Payment at superannuation in addition to gratuity. 1/10 th of monthly emoluments ( pay +DA) as on the date of superannuation for every completed six months of the service. This Payment will not reduce the quantum of assured pension.
For NPS Subscribers
- Provisions of UPS will apply to past retirees of NPS (who have already superannuated). Arrears for past period will be paid with interest at PPF rates.
- UPS will be available as an option to the employees. Existing NPS / VRS with NPS as well as future employees will have an option of joining UPS. Choice, once exercised, will be final.
- UPS is being implemented by the Central Government. Benefiting ~23 lakh Central Government employees. The same architecture has been designed for adoption by State Governments. If also adopted by State Governments, can benefit over 90 lakh Government employees who are presently on NPS.
Government says UPS five pillars which includes assured pension, assured family pension, assured minimum pension, inflation linked indexation, and gratuity on retirement.
NPS Scheme
NPS also known as National pension Scheme, Regulated by PFRDA (Pension fund regulatory and development authority of India), under the jurisdiction of Ministry of Finance and Government of India. The New Pension Scheme was implemented with the decision of the Union government to replace the old pension Scheme which had defined-benefit pensions for all its employees. Notification issued by the Ministry of Finance in a Press Release dated 22 December 2003 mandated NPS for all new recruits (except armed forces) joining
government services from 1 January 2004 While the scheme was initially designed for government employees only, it was opened up for all citizens of India between the age of 18 and 65 in 2009, for OCI card holders and PIO’s in October 2019. On 26 August 2021, PFRDA increased the entry age for the National Pension System (NPS) from 65 years to 70 years. As per the revised norms, any Indian Citizen, resident or non-resident, and Overseas Citizen of India (OCI) between the age of 18–70 years can join NPS and continue or defer their NPS Account up to the age of 75 years.
Minimum and Maximum investment required
The minimum initial contribution to NPS Tier 1 account is Rs. 500. The minimum annual contribution required is Rs. 1,000 with the minimum amount per contribution being Rs. 500. There is no limit to the maximum annual contribution or the number of times one can contribute annually.
National Pension Scheme Tax Benefits
Employee Tax Benefits For Self-Contribution:
Employees who contribute to NPS can claim the following tax benefits on their contributions:
- Tax deduction of up to 10% of pay (Basic + DA) under Section 80CCD(1), subject to a maximum of Rs.1.5 lakh under Section 80CCE.
- Tax deduction of up to Rs.50,000 under Section 80CCD(1B), along with the overall limit of Rs.1.5 lakh under Section 80CCE.
Employee Tax Benefits On Employer Contributions:
Employer’s contribution towards NPS of an employee is eligible for a tax deduction of up to 10% of salary, i.e. basic plus DA, or 14% of salary if such contribution is made by the Central Government under Section 80CCD(2) beyond the Rs.1.5 lakh limit provided under Section 80CCE.
Note: As per the Budget 2024, the contribution allowed by employer’s has been increased to 14% from 10% of the salary. This change will be effective from 1st April, 2025.
Tax Benefits For Self-employed People:
Self-employed individuals who contribute to NPS can claim the following tax benefits on their own contributions:
- Tax deduction of up to 20% of gross income under Section 80CCD(1), subject to a total limit of Rs.1.5 lakh under Section 80CCE.
- Tax deduction of up to Rs.50,000 under Section 80CCD(1B), along with the overall limit of Rs.1.5 lakh under Section 80CCE.
Tax Benefits On Partial Withdrawal From NPS Account:
Partial withdrawals from NPS are eligible for tax exemption when the amount withdrawn is up to 25% of self-contribution, subject to the circumstances and criteria prescribed by PFRDA under section 10(12B).
Tax Benefit On Annuity Purchase:
Tax exemption is provided on annuity purchase or superannuation at 60 years under Section 80CCD(5). However, the subsequent income from an annuity is taxed under Section 80CCD(3).
Tax Advantages On Lump Sum Withdrawal:
Section 10 provides a tax exemption on a lump sum withdrawal of 60% of accrued NPS funds upon reaching 60 years or superannuation.
Corporate/employer Tax Breaks:
A tax deduction is provided on the amount contributed to an employee’s NPS account as an employer contribution, up to 10% of the employee’s salary (Basic + DA) of the employer’s contribution as a ‘Business Cost’ from the Profit & Loss Account under section 36(1)(iv)(a).
National Pension Scheme Withdrawal Rules After Retirement (60 years)
Presently, a person can withdraw up to 60% of the total corpus as a lump amount after retirement, with the remaining 40% going into an annuity plan. Subscribers can withdraw the entire corpus if it is less than or equal to Rs 5 lakh without purchasing an annuity plan under the new NPS guidelines. These withdrawals are also tax-free.
For example, if a person has a Rs 4.5 lakh corpus, they can withdraw the entire sum after retirement. However, if the corpus exceeds Rs 10 lakh, the tax-free withdrawal limit is Rs 6 lakh. For the remaining Rs 4 lakh, they must get an annuity plan.
Although withdrawals are tax-free, an annuity is taxable based on the income bracket. As a result, if your annuity is worth Rs 4 lakh, it will be taxed at the individual’s tax bracket rate. The payment is taxable in accordance with the years of payment.
