Prime Minister Narendra Modi’s government, on August 24, 2024, approved the Unified Pension Scheme (UPS) for government employees, which will benefit 23 lakh Central government employees. State governments will also be given the option to opt for the UPS. If state governments opt for UPS, then the number of beneficiaries will be additionally another 90 lakhs.
According to the government, the expenditure on arrears will be Rs 800 crore, while the annual cost increase will be around Rs 6250 crore in the first year. UPS will be effective from April 1, 2025. Central government employees will be given the option of choosing between National Pension Scheme (NPS) and UPS. Existing Central government NPS subscribers will also be given the option to switch to UPS. The NPS, based on a contribution model, applies to government employees who started their service on or after April 1, 2004.
Key differences between UPS, NPS and OPS
Well, the Old Pension Scheme (OPS) provides 50 per cent of an employee’s salary at the time of retirement as a pension. A key feature of OPS is the General Provident Fund (GPF), allowing employees to contribute a portion of their salary, which is returned with interest upon retirement. Additionally, OPS offers a gratuity amount of up to Rs 20 lakh. Payments are made directly from the government treasury, ensuring that pensions are fully funded by the government. In case of the retiree’s death, their family continues to receive the pension. Notably, there is no salary deduction for the pension under OPS, and employees benefit from Dearness Allowance (DA) adjustments every six months to keep pace with inflation.
The New Pension Scheme (NPS) on the other hand operates differently, with 10 per cent of an employee’s basic salary plus DA being deducted for the pension fund. To secure a pension upon retirement, 40 per cent of the NPS fund must be invested in equities or market linked annuities. NPS does not guarantee a fixed pension amount after retirement; instead, the pension depends on the fund’s performance. Furthermore, NPS does not offer DA adjustments post-retirement.
The Unified Pension Scheme (UPS) shifts the responsibility for funding the pension away from employees. Under UPS, employees are entitled to receive 50 per cent of their average basic pay from the last 12 months before retirement as their pension. In the unfortunate event of an employee’s death before retirement, 60 per cent of the pension is provided to the spouse. For employees with shorter service periods, UPS guarantees a minimum pension of Rs 10,000 per month. The scheme also includes inflation indexation, similar to DA, to adjust the assured pension, family pension, and minimum pension according to inflation rates. Additionally, UPS provides a lumpsum payment at retirement. Employees receive 1/10th of their monthly salary (pay + DA) as a one-time payment for every six months of service, on top of the gratuity amount.
So, in many ways, the UPS combines the best of both the OPS and NPS and is a landmark reform by the Modi government.
While the OPS offers stability and government-backed funding, the NPS provides a market-linked approach with limited risks but higher returns. The UPS, however, aims to combine the best of both worlds by offering assured benefits and inflation protection, without placing the funding burden on employees. As government employees weigh their options, the UPS presents itself as a compelling alternative in the evolving debate over pension benefits.
PM Modi formed a committee, led by Cabinet Secretary TV Somanathan, to address the issue, which conducted a thorough investigation, engaging in over 100 meetings with various organisations and nearly all the states. The committee sought inputs from a wide range of stakeholders, including the Reserve Bank of India and the World Bank, to ensure a well-informed decision-making process. Based on the extensive deliberations and recommendations put forth by the committee, the UPS was announced.
The provisions of UPS will apply to past retirees of NPS (who have already superannuated). Arrears for past periods will be paid with interest at PPF rates. Employee contribution will not increase. Government contribution, however, has increased from 14 per cent to 18.5 per cent. After January 1, 2004, the Central government employees are currently covered under the NPS which provides for annuity/lumpsum payment based on market earned return. UPS, in some ways, is the return of the defined benefit pension scheme era, which has been the demand of several government employees. But UPS will not be a burden on the government exchequer and therein lies its biggest strength, making it a win-win for all.
Remember, in OPS, employees are free to contribute 7 per cent of their basic salary in GPF. The government guarantees interest on this portion. The employees can withdraw this money as per their convenience. On retirement, they get this entire money in lumpsum. On retirement, they also get 50 per cent of their last salary separately, as pension every month. This money, over the years, kept increasing due to higher dearness allowance (DA) under OPS. In NPS, instead of 7 per cent GPF, 10 per cent is deducted as CPF. The government also contributes 14 per cent from its side as against 10 per cent, earlier, under NPS. Whatever corpus is collected on retirement, 60 per cent of it is given to the employee. 40 per cent of the NPS fund has to be invested in the form of annuity.
Unlike the NPS, under the UPS, there will be a provision of a fixed assured pension.
The Unified Pension Scheme is based on five people-friendly themes:
(1) Assured Pension: Under the UPS, the fixed pension will be 50 per cent of the average basic pay drawn over the last 12 months prior to superannuation for a minimum qualifying service of 25 years. This pay is to be proportionate for a lesser service period up to a minimum of 10 years of service.
(2) Assured Family Pension: It will also have an assured family pension, which is 60 per cent of the employee’s basic pay. It will be given immediately in case of the demise of the employee.
(3) Assured Minimum Pension: In the case of superannuation, after a minimum 10 years of service, the UPS has a provision of an assured minimum pension of Rs 10,000 per month.
(4) Inflation Indexation: There is a provision of indexation benefit on assured pension, on assured family pension and on assured minimum pension.
(5) Gratuity: Lumpsum payment at superannuation in addition to gratuity. It will be 1/10th of the monthly emolument (pay + dearness allowance) as on the date of superannuation for every completed six months of service. This payment will not reduce the quantum of assured pension. Central government employees will have a right to decide to stay in the NPS or join the UPS. Though the new scheme will take effect from April 1, 2025, everybody who has retired under NPS from the time of its inception and also including those retiring till March 31, 2025, will also be eligible for all the benefits of the UPS. They will get arrears of the past after adjusting whatever they have withdrawn.
Introduced in January 2004, the NPS originally served as a government-sponsored retirement plan exclusively for government employees. Later, in 2009, it was expanded to all other sectors. The NPS is governed jointly by the Central government and the Pension Fund Regulatory and Development Authority (PFRDA) and is designed as a long-term, voluntary investment program tailored for retirement. The NPS assures a pension, with the potential for substantial investment gains. Upon retirement, a subscriber has the option to withdraw a portion of their accumulated corpus, while the remaining amount is disbursed as a monthly income. This strategy provides a steady stream of income after retirement.
The NPS is divided into two tiers: Tier 1 accounts and Tier 2 accounts. Individuals who choose a Tier 1 account can withdraw cash only after they retire, but Tier 2 accounts allow for early withdrawals. Under Section 80 CCD of the Income Tax Act, investing in the NPS provides tax advantages of up to Rs 1.5 lakh. Withdrawing 60 per cent of the NPS corpus makes it tax-free. This makes it an appealing option for retirement planning since it provides the possibility of a lumpsum payoff.
The NPS replaced the old pension scheme. The old pension scheme (OPS), referred to as the Defined Benefit Pension System (DBPS), was based on the last pay drawn by the employee. The NPS is referred to as the Defined Contribution Pension System (DCPS), in which the employer and employee contribute to build a pension wealth payable at the time of retirement, by way of annuity/lumpsum withdrawal as per norms. Under the OPS, the employee could withdraw 50 per cent of the last-drawn salary as pension after retirement. Under the NPS, a person is allowed to withdraw 60 per cent of the accumulated corpus contributed during his/her working years at the time of retirement, which is tax-free. The remaining 40 per cent is converted into an annuitized product, which could currently provide the person with a pension of 35 per cent of his/her last-drawn pay. The NPS is applicable to all employees joining services of the Central government, including Central autonomous bodies (except Armed Forces) on or after January 1, 2004.
Be it UPS or Lakhpati Didi scheme, PM Modi is the harbinger of welfarism with a reformist ethos. Beyond financial success, Lakhpati Didis have chosen to inspire by adopting sustainable livelihood practices and achieving a decent standard of life. Self Help Groups (SHGs) support this journey with collective action, financial literacy, and skill development, empowering members for entrepreneurial ventures. The Modi government has actively backed this initiative, promoting diversified livelihood activities and fostering collaboration across sectors for strategic planning and implementation.
Similarly, the Sansad Adarsh Gram Yojana (SAGY) is a rural development initiative initiated by the Modi government. In this program, individual Members of Parliament (MPs) commit to enhancing both the physical and institutional infrastructure of selected villages. Within the SAGY framework, the aim is to promote the development of Gram Panchayats by strategically implementing various existing government schemes and programs in a collaborative manner, converging resources, and fostering community and private sector involvement. To cut a long story short, be it Lakhpati Didis, SAGY or UPS, Prime Minister Modi has always walked the talk in terms of marrying growth with equity and welfarism with pragmatism.
Sanju Verma is an economist, national spokesperson for BJP and bestselling author of ‘The Modi Gambit’. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect News18’s views.
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