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Unified Pension Scheme (UPS): Clarity Is Required On These Five Points Before Choosing Between UPS And NPS

The government has announced the Unified Pension Scheme (UPS) for central government employees in August 2024. Now PFRDA has issued the draft regulations for UPS this month; however, a few key details still need clarification before one can assess its viability

February 3, 2025
February 3, 2025

The government announced the Unified Pension Scheme (UPS) on August 24, 2024, with an implementation deadline of April 1, 2025. In this regard, on January 24, the Finance Ministry through a gazette notification, issued the formula and other criteria to calculate the pension under UPS. The Pension Fund Regulatory and Development Authority (PFRDA) has been given the responsibility to draft the regulations. On January 27, 2025, PFRDA issued the ‘PFRDA (Unified Pension Scheme) Regulations, 2025,’ providing details on the UPS framework along with the operational guidelines.

The draft regulations are open for suggestions from the stakeholders and the public till February 17, 2025. However, a few points are not clear in this draft, and thus, one needs to wait a little longer before deciding between UPS and National Pension System (NPS), until there is more clarity on these points. 

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Benchmark Corpus:

 The pension will be calculated based on a formula, which will have the components of individual corpus and benchmark corpus. However, how the benchmark corpus will be calculated, is not clear. 

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PFRDA’s draft explains Benchmark Corpus as the corpus value as determined by the Authority and computed for comparison with individual corpus based on the following assumptions:

  • Regular and timely receipt of applicable contributions of both employer and employee for each month of qualifying service

  • Contributions being invested in the default pattern

  • There are no partial withdrawals during the accumulation phase

The assumptions are given however more clarity is needed on how to reach this corpus figure because that would be the maximum amount one can receive in pension. Any excess amount in the individual corpus over it would be returned in a lump sum to the employee. 

Default Pattern:

Benchmark corpus talks about the default pattern investment, however, what is it and its allocation? As per PFRDA’s draft regulation, “Default pattern means pension fund and investment pattern determined by the Authority in respect of individual corpus”.

Unlike NPS, where the ‘auto option’ has the categories stipulating the maximum equity exposure aligning with one’s age, there is no clarity in UPS as of now about what the allocation in the default pattern will be.

Also Read: Budget 2025: What Is Costlier, What Is Cheaper  

Three Investment Patterns:

If one wants to opt for an investment pattern instead of choosing a ‘default pattern’, one can do so. The draft regulation presents these choices: To invest 100 per cent individual corpus in government securities (Scheme G) or invest in ‘any one of the three Life Cycle based schemes’.

However, instead of THREE, it only mentions two schemes.

  1. Conservative Life Cycle Fund with equity exposure capped at 25 per cent (LC-25)

  2. Moderate Life Cycle Fund with equity exposure capped at 50 per cent (LC-50).

The third scheme is not mentioned in the draft regulation. Clarity is required on this point. 

Rules For An Employee Discharged Or Removed From Services After Opting For UPS:

In the gazette notification dated January 24, 2025, the Department of Financial Services (DFS) excluded the following employees from opting for UPS benefits. It reads, “Assured Payout shall not be available in case of removal or dismissal from service or resignation of the employee. In such cases, the Unified Pension Scheme option shall not apply”. 

However, if a person opts for the UPS on its implementation on April 1, 2025, or after, and is discharged from duties later due to any of the aforesaid reasons, pension treatment is ambiguous. The draft provisions provide no clarity about how the pension of such employee will be treated.

Also Read: Budget 2025 Income Tax Slabs: How Much Can Seniors Save With The Increased Tax Exemption Limit?  

The Taxation:

Taxation is a key consideration when opting for any investment. While evaluating NPS and UPS, one must not forget that in the case of NPS, the lump sum withdrawal amount (60 per cent) is tax exempted, and the remaining 40 per cent, which is paid through an annuity, is taxable. However, what the taxation be for UPS, is yet to be announced. Until then it remains a question before one can decide to go with UPS or NPS.

All these points are crucial to be answered because beneficiaries will have only a one-time option and once chosen, they can't go back on their choice.

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