Unified Pension Scheme (UPS) Vs National Pension Scheme (NPS): Details, Benefits, and Returns

The pension schemes in India are varied, and designed to meet the different needs of public and private sector employees. It’s important to understand these schemes to make well-informed retirement planning decisions. The Modi government has launched a new pension plan called the Unified Pension Scheme (UPS) for central government employees who joined after January 1, 2004. Starting from April 1, 2025, this scheme will provide a pension amounting to 50% of the basic salary. The introduction of the UPS comes in response to several non-BJP states reverting to the DA-linked Old Pension Scheme (OPS) and increasing demands from employee organizations in other states for similar changes. Employees will have the choice to opt for either the UPS or the National Pension Scheme NPS).

This blog will explore two prominent pension schemes in India: the Unified Pension Scheme (UPS), and the National Pension Scheme (NPS). We will examine their main features, advantages, and differences to assist you in understanding the pension options available.

What is the Unified Pension Scheme?

The Unified Pension Scheme (UPS) is a new initiative by the Indian government aimed at merging multiple pension schemes into a single, unified system. Its purpose is to simplify pension management, offer more consistent benefits, and enhance coverage for employees. The UPS is intended to gradually replace current schemes, providing a more standardized and efficient method for retirement planning.

Details of Unified Pension Scheme (UPS)

Scheme Name	Unified Pension Scheme (UPS)
Announced on	24 August 2024
Implementation Date	1 April 2025
Beneficiaries	Central Government employees
Employee Contribution	10% of basic salary + dearness allowance
Employer Contribution	18.5% of basic salary + dearness allowance
Benefits	A pension equal to 50% of the average basic pay from the last 12 months before retirement for employees with a minimum of 25 years of service. A monthly pension of Rs. 10,000 upon retirement after at least 10 years of service

Benefits of the Unified Pension Scheme (UPS)

1. Pension assurance: Retired employees are guaranteed to receive a pension equal to 50% of their average basic pay from the last 12 months before retirement. This benefit is available to those with at least 25 years of service. For employees with shorter service periods, ranging from 10 to 25 years, the pension benefits are provided proportionally.

2. Government contribution – The government will contribute 18.5% of the employee’s basic salary to the pension fund, while employees will contribute 10% of their basic salary.

3. Guaranteed Family Pension: If the pensioner passes away, their spouse will receive 60% of the pension amount that was being paid just before the pensioner’s death.

4. Inflation Adjustment: Inflation adjustments will apply to guaranteed pensions, guaranteed minimum pensions, and guaranteed family pensions. The All India Consumer Price Index for Industrial Workers (AICPI-IW) will figure the Dearness Allowance for active employees.

5.Lump Sum Payment: Upon retirement, retirees will receive a lump sum payment in addition to their gratuity. This payment will amount to one-tenth of their monthly salary (including pay and dearness allowance) for every six months of completed service, based on the superannuation date. This lump sum will not affect the guaranteed pension amount.

What Returns are expected under the Unified Pension Scheme (UPS)?

The UPS scheme guarantees a pension for government employees when they retire. Employers will contribute 18.5% of the basic salary plus dearness allowance, while employees will contribute 10% of the basic salary plus dearness allowance each month.

Employees who retire after at least 25 years of service will receive a pension equal to 50% of their average basic pay from the last 12 months before retirement. Those retiring after a minimum of 10 years of service will get a pension of Rs. 10,000 per month.

What is the National Pension Scheme?

The National Pension Scheme (NPS) is a social security program introduced by the Central Government. It is available to employees across public, private, and unorganized sectors, though not for armed forces personnel. The scheme promotes regular contributions to a pension account throughout one’s career. Upon retirement, subscribers can withdraw a portion of their accumulated corpus, with the remaining balance providing a monthly pension.

Details of the National Pension Scheme

Feature	Description
Introduction	Launched in January 2004 for central government employees; extended to all citizens in 2009.
Eligibility	All Indian citizens who are between the ages of 18 and 65.
Contributions	Minimum of ₹500 per contribution and ₹1,000 per year. Contributions can be made on a monthly, quarterly, or annual basis.
Contribution Types	Tier I: Mandatory account with tax benefits; Tier II: Optional savings account without tax benefits.
Investment Choices	Various fund options include Equity (E), Government Securities (G), Corporate Bonds (C), and alternative investments (A).
Returns	Returns are market-linked and depend on the performance of chosen investment options.
Tax Benefits	Contributions up to ₹1.5 lakh qualify for tax deduction under Section 80C; an additional ₹50,000 under Section 80CCD(1B).
Withdrawal	Partial withdrawals are allowed under specific conditions; lump sum and annuity payments upon retirement.
Pension Options	Annuities must be purchased with at least 40% of the accumulated corpus; the remaining can be withdrawn as a lump sum.
Regulator	UPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
Transferability	Accounts can be transferred across jobs and locations, ensuring portability.

Benefits of National Pension Scheme

1. Interest Rate – The NPS allocates a part of its funds to equities, which may not guarantee returns but often provide higher interest rates compared to traditional tax-saving investments like the PPF. Over the past decade, the scheme has achieved annualized returns ranging from 9% to 12%. Additionally, you have the flexibility to switch fund managers if you’re dissatisfied with your fund’s performance.

2. Risk Analysis – The National Pension Scheme (NPS) allows you to invest between 50% and 75% of your funds in equities, but for government employees, the limit is set at 50%. The equity portion will decrease by 2.5% annually starting from the investor’s 50th birthday. For investors aged 60 and older, the cap remains fixed at 50%, helping to stabilize the risk-return balance and protect the corpus from market volatility. Overall, the NPS offers greater earning potential compared to other fixed-income schemes.

3. Regulation – The PFRDA oversees the NPS by enforcing clear investment guidelines, conducting regular performance evaluations, and monitoring fund managers through the NPS Trust.

4. Flexibility – The NPS offers flexible subscription options, allowing subscribers to contribute at any time during the financial year and adjust the frequency of their contributions. Subscribers have the freedom to select their own investment choices and can manage their accounts online from any location. The account remains active even if they relocate or change jobs.

What Returns are expected under the National Pension Scheme (NPS)?

NPS Tier 1 Returns

Asset Classes	1-year returns(%)	5-year returns (%)	10-year returns(%)
Scheme A	6.60%-11.59%	6.04%-9.03%	NA
Scheme E	31.52%-40.31%	16.83%-18.65%	13.13%-14.39%
Scheme C	6.89%-7.96%	6.98%-8.05%	8.40%-8.99%
Scheme G	8.77%-9.36%	7.23%-7.50%	8.87%-9.63%

NPS Tier 2 Returns

Asset Classes	1-year returns(%)	5-year returns (%)	10-year returns(%)
Scheme C	7.24%-8.11%	7.24%-7.98%	8.41%-8.79%
Scheme G	8.31%-9.38%	7.17%-7.47%	8.89%-9.68%
Scheme E	31.07%-39.99%	16.86%-18.50%	12.69%-14.22%
Scheme Tax Saver	6.75%-13.22%	NA	NA

Unified Pension Scheme (UPS) Vs National Pension Scheme (NPS)

Particulars	UPS	NPS
Employers contribution	Employers will contribute 18.5% of the basic salary to the pension fund.	Employers will contribute 14% of the basic salary to the pension fund.
Pension	The 50% of the average basic pay from the last 12 months before retirement for employees with 25 years of service.	The NPS doesn’t offer a fixed pension amount. The pension depends on the returns from investments and the total accumulated corpus.
Family pension	In the case of the retiree’s death, 60% of the pension received immediately before the retiree’s demise will be provided to his/her family.	The family pension under the NPS is based on the accumulated corpus and the selected annuity plan.
Minimum pension amount	The employees will get a minimum of Rs.10,000 per month and retire after a minimum of 10 years of service.	The pension amount is based on investments in market-linked schemes.
Lump sum amount	A lump sum payment is given to employees upon retirement, calculated as one-tenth of their last drawn salary.	Employees can withdraw up to 60% of the NPS corpus as a lump sum upon superannuation.
Inflation protection	The UPS provides inflation protection, with pensions adjusted based on the AICPI-IW.	The NPS does not include automatic Dearness Allowance (DA) increases for inflation protection.

Conclusion

In summary, the Unified Pension Scheme (UPS) and the National Pension Scheme (NPS) cater to different financial needs. The UPS combines features of Defined Benefit and Defined Contribution schemes, offering a balanced approach with flexibility and portability. Meanwhile, the NPS, being market-linked, focuses on long-term savings with significant tax benefits and potential for higher returns. The UPS suits those seeking stability and some investment choice, while the NPS is ideal for those looking for higher returns and tax advantages. Choosing the right scheme depends on your retirement goals and financial situation.

For Other Investment options, check the links:

Investment options for 25 year old, SBI Annuity Scheme, Bonds Investment