The National Pension System (NPS) is a government-backed market-linked scheme that provides pensions based on the invested amount and the performance of the assets in the annuity plan. Upon retirement, the subscriber can withdraw up to 60 per cent of the accumulated corpus in a lump sum tax-free or systematically at fixed intervals, and the rest has to be invested in an annuity plan. The income from the annuity is taxed as per the tax slab rates. 

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On the other hand, the Unified Pension Scheme (UPS) provides 50 per cent of the average basic salary drawn in the last 12 months before retirement for employees with 25 years of service, while those who have for more than 10 years but less than 25 years, the pension amount will be calculated “proportionately”. UPS also provides a guaranteed family pension equivalent to 60 per cent of the employee's pension immediately before death.

The government will launch UPS on April 1, 2025.Some 23 lakh central government employees, currently under the NPS regime, can avail of the scheme if they decide to switch. The scheme is also open for the state government employees if their employers offer the facility.

Some Key Differences between NPS and UPS are as follows:

Eligibility: NPS is for the government and formal private sector employees, while UPS is only for central and state government employees.

Contribution: BothNPS and UPS require a 10 per cent contribution from employees, with the government’s contribution being 14 per cent for NPS and 18.5 per cent for UPS.

Benefits: NPS is a participatory scheme where both the employees and the governmentcontribute to the fund, whereasUPS is a fixed pension scheme for life, although both sides still contribute. In UPS, the monthly pensions are inflation-adjusted.

Flexibility: NPS offers flexible investment options and the power to choose the fund manager, unlike UPS where these things are not applicable as the government pays the pension.

Fixed Income: NPS is a retirement savings tool that helps retirees create wealth in the long term by investing in various financial assets like debt, equity, government securities, and alternative investment funds, ensuring financial discipline and positive habits. On the other hand, UPS is a defined pension scheme managed by the government.

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Retirement Corpus: NPS provides subscribers with active and auto-choice investment modes: aggressive, moderate, and conservative. Active choice allows users to allocate a percentage of assets, like equity, corporate debt, government securities, and alternative funds. They can also choose from nearly half a dozen pension fund managers. However, it is difficult to predict the exact corpus at retirement. In UPS, it is predictable.