The Unified Pension Scheme

The replacement of the Old Pension Scheme by the NPS in 2004 left Central Government employees bearing market risk on their retirement income. Pressure for a return to an assured pension grew, and several States reverted to the Old Pension Scheme. The Central Government's response was the Unified Pension Scheme (UPS), approved in August 2024 and operational from 1 April 2025. It offers an assured payout linked to last pay, while keeping the contributory, funded structure of the NPS.

1. Background and Timeline

• Committee: the scheme followed the review of the NPS by a committee chaired by T.V. Somanathan, then Finance Secretary, set up in 2023.
• Cabinet approval: 24 August 2024.
• Notification as an option under the NPS: 24 January 2025.
• PFRDA regulations: the PFRDA (Operationalisation of the Unified Pension Scheme under the National Pension System) Regulations, 2025, notified on 19 March 2025.
• Effective date: 1 April 2025.
• Service rules: the Central Civil Services (Implementation of the Unified Pension Scheme under the National Pension System) Rules, 2025, notified on 4 September 2025.
• Option window: existing employees had to choose by a cut-off date, extended from 30 June 2025 to 30 September 2025 and then to 30 November 2025.

2. Who Can Opt

• Existing employees of the Central Government covered by the NPS on 1 April 2025;
• New recruits joining Central Government service on or after 1 April 2025, who choose at the time of joining;
• Past retirees covered by the NPS who retired before 31 March 2025, and the legally wedded spouses of deceased past retirees, who receive arrears of the difference with interest.

The UPS is an option. Employees who do not choose it remain under the NPS. States may adopt a similar scheme for their own employees.

3. The Assured Benefits

• Assured payout: 50 per cent of the average basic pay drawn over the last twelve months before superannuation, for a minimum qualifying service of 25 years; proportionate for service between 10 and 25 years.
• Minimum payout: ₹10,000 a month on superannuation after at least 10 years of service.
• Family payout: 60 per cent of the payout the employee was receiving immediately before death, to the spouse.
• Inflation indexation: the assured payout, family payout and minimum payout carry dearness relief based on the All India Consumer Price Index for Industrial Workers, as for serving employees.
• Lump sum on superannuation: one-tenth of monthly emoluments (pay plus dearness allowance) on the date of superannuation for every completed six months of service. This is in addition to the payout and does not reduce it.
• Voluntary retirement: after 25 years of service, the payout begins from the date the employee would have reached superannuation.

4. Funding

• Employee: 10 per cent of basic pay plus dearness allowance, as under the NPS.
• Government: 18.5 per cent, made up of 10 per cent to the employee's individual corpus and 8.5 per cent to a pool corpus that supports the assured payout.
• Two corpuses: the individual corpus is invested like an NPS account; the pool corpus is invested by the Government's choice of pension funds. On superannuation, the individual corpus is used to support the payout, with the pool corpus and the Government meeting any gap.
• Withdrawal and payout: an employee may withdraw part of the individual corpus at retirement, but the assured payout is then reduced proportionately.
• Tax: the Government extended to the UPS the tax treatment available under the NPS, with necessary changes.

5. Switching from UPS to NPS

The 2025 service rules allow an employee who has opted for the UPS a one-time switch back to the NPS, up to one year before superannuation, or three months before voluntary retirement. The switch is not available where the employee is facing removal, dismissal or compulsory retirement as a penalty, or disciplinary proceedings. Once made, the switch to the NPS is final.

6. Relationship with the PFRDA Act

• Within the NPS: the UPS is structured as an option under the NPS, so contributions, recordkeeping and investment run through the same intermediaries and remain subject to PFRDA's regulation.
• Assurance from the Government: Section 20(2) excludes any assurance of benefits under the NPS except market-based guarantees. The UPS assurance comes from the Government as employer, funded through the pool corpus and Government budgets, not from the NPS itself.
• Regulations: PFRDA's operationalisation regulations govern how the UPS is run within the NPS; the benefits themselves are governed by the Central Government's scheme notification and service rules.

7. Assessment

• For employees: the UPS restores income certainty and inflation protection, the main demands behind the call for the Old Pension Scheme, while requiring a contribution.
• For the exchequer: unlike the unfunded Old Pension Scheme, the UPS is funded, with a pool corpus built during service, though the Government still bears the risk of shortfall.
• Concerns: the payout is less generous than the Old Pension Scheme for some employees, part of the individual corpus effectively passes to the pool, and take-up by existing employees was reported to be low, which led to repeated extensions of the option window.

8. Related Topics and Provisions

• The NPS across sectors
• Contributions, portability and points of presence
• Old Pension Scheme and NPS: the debate
• Central Civil Services (Implementation of NPS) Rules, 2021
• Corpus refund and Centre-State issues