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UPS vs NPS: Key Differences
Posted on Thursday, January 23rd, 2025 | By IndusInd Bank
The Unified Pension Scheme (UPS) was introduced by the Government of India in August 2024 and is expected to be fully implemented by April 2025.
This scheme is designed to offer central government employees a more secure retirement by offering an assured pension during their golden years. With its salient features, such as inflation indexation, the UPS proves to be a worthy competitor to its counterpart, the National Pension Scheme. Government employees who have joined the public sector after 2004 and are covered under the NPS can opt for the UPS.
If you are wondering which scheme should you opt – UPS vs NPS – for a worry-free retirement, here is a guide to help you choose.
What is Unified Pension Scheme?
The Unified Pension Scheme (UPS) is a new pension plan for an estimated 23 lakh central government employees. If state governments also adopt UPS (Maharashtra already has, in August 2024), the list of UPS beneficiaries can go up to 90 lakh employees.
This scheme is designed to provide fixed pension payouts while retaining some of the flexibility offered by NPS.
What is the New Pension Scheme?
The New Pension Scheme (NPS)—now officially known as the National Pension System—is a government-backed retirement savings initiative that’s been around since 2004. It was launched to encourage people to plan ahead for retirement by making small, regular contributions while they’re still earning.
Now, here’s the key difference: the old pension system guaranteed a fixed payout every month after retirement. NPS doesn’t work like that. Instead, it’s a defined contribution plan, which means your retirement payout depends on how much you invest and how well those investments perform over time.
It’s open to all Indian citizens between 18 and 70 years of age, including salaried professionals, freelancers, and even NRIs. NPS offers two account types to suit different needs:
- Tier I Account: This is the main retirement account. It comes with tax benefits but has some restrictions on withdrawals.
- Tier II Account: This is a flexible savings account. You can withdraw money freely, but it doesn’t come with the same tax perks.
Your contributions are managed by expert Pension Fund Managers (PFMs), who invest them across equities, government securities, and corporate debt—based on your chosen risk level.
If you’re looking for a disciplined way to build wealth for retirement with a mix of safety and growth potential, NPS might just be worth a closer look.
UPS Vs NPS: Key Difference based on Features
Let’s break down how the Unified Pension Scheme (UPS) compares with the New Pension Scheme (NPS) across important factors:
| Feature | Unified Pension Scheme (UPS) | New Pension Scheme (NPS) |
| Eligibility | Central government employees with at least 10 years of service. Full pension typically requires 25 years. | Open to all Indian citizens aged 18–70, including NRIs and private sector employees. |
| Government/Employer’s Contribution | 18.5% of the employee’s basic salary and Dearness Allowance (DA). | 14% of basic salary and DA for government employees. |
| Employee’s Contribution Rate | 10% of basic pay plus DA. | 10% of basic + DA for government employees; others can contribute up to 20% of gross income. |
| Minimum Pension Amount | ₹10,000 per month, if the employee completes at least 10 years of service. | No guaranteed minimum—payout depends on the accumulated corpus and chosen annuity. |
| Gratuity | One-tenth of monthly emoluments for every six months of completed service. | Not directly linked. You can withdraw up to 60% of your total corpus as a lump sum at retirement. |
| Tax Benefit | Tax treatment is under consideration; specific yet to be clarified. | Tax deductions available under Sections 80CCD(1) and 80CCD(1B); part of the maturity amount is also tax-exempt. |
| Inflation Protection | Pension amount is adjusted for inflation, helping preserve purchasing power. | No direct inflation indexation—returns depend on market performance and investment mix. |
| Assured Pension | Provides a guaranteed pension equal to 50% of the average basic salary for the last 12 months before retirement for those with 25 years of service. | The pension is not guaranteed and depends on market returns. The value fluctuates based on the investments and the accumulated corpus. |
| Family Pension | Guarantees 60% of the pension to the family in the event of the pensioner’s death. | The family pension depends on the accumulated corpus and the annuity plan chosen. |
| Risk and Return | Offers no market risk and guaranteed fixed returns; suitable for risk-averse employees | Since it is a market-linked pension scheme, the returns vary based on the performance of the chosen investments. This means potentially higher returns but with greater risk. |
| Lump-Sum Payment | Provides a lump sum without affecting the pension amount. | Allows up to 60% of the total accumulated corpus to be withdrawn. |
Also Read: Mastering the Art of Long-Term Savings- A Complete Roadmap for Financial Success
Conclusion
The Unified Pension Scheme (UPS) provides a secure and predictable pension solution for government employees. In the UPS vs NPS debate, while NPS may lead to potentially higher returns due to the market-linked investments, UPS focuses on assured benefits and inflation protection.
Retirement planning is a major element of a solid financial portfolio. Before that, however, it is crucial to have the basics right – that is, one must open a savings account online with the right banking partner. And with options, such as the feature-rich Zero Balance Account from IndusInd Bank, you not only enjoy no minimum balance requirements but also 24/7 digital banking services, instant account opening, and more! Enjoy competitive interest rates on savings account variants amongst many other features.
Open a Savings Account with IndusInd Bank today!
Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.
