FAQs Chart UPS Pension Tax Gains
New Delhi: The Department of Financial Services (DFS) today released Frequently Asked Questions (FAQs) detailing tax treatments under the Unified Pension Scheme (UPS), clarifying exemptions and deductions for Central government employees to guide retirement planning decisions.
Published on the DFS website, the FAQs outline how UPS, an option under the National Pension System (NPS), offers tax benefits like exempt lump-sum payments and deductible contributions. The scheme, notified by the Ministry of Finance on January 24, 2025, applies to recruits joining from April 1, 2025, with existing NPS employees and past retirees eligible to opt in by September 30, 2025.
The UPS framework was formalised through the Pension Fund Regulatory and Development Authority (PFRDA) regulations on March 19, 2025, titled the PFRDA (Operationalisation of the Unified Pension Scheme under NPS) Regulations, 2025. Aimed at helping employees make informed choices, the FAQs address key tax aspects of UPS contributions, withdrawals, and pension payouts, ensuring clarity for central government staff navigating retirement options.
Key Tax Treatments Under UPS
The FAQs provide detailed answers on the tax implications of UPS, integrated below to highlight their role in employee decision-making:
- Tax Treatment for Government Contributions to Individual Corpus
The central government contributes 10% of the monthly emoluments (Basic Pay + Dearness Allowance) to an employee’s individual corpus. This is deductible under Section 80 CCD(2) of the Income Tax Act, 1961 [Section 124(1) of the Income Tax Act, 2025], as UPS operates under the NPS framework. - Tax Treatment for Employee Contributions
Employee contributions up to 10% of monthly emoluments are deductible under Section 80 CCD(1) [Paragraph 1(y) of Schedule XV of the Income Tax Act, 2025], aligning with NPS tax benefits. - Tax Treatment for Government Contributions to Pool Corpus
An additional 8.5% of monthly emoluments contributed by the government to the pool corpus at an aggregate level is not treated as employee income, thus not taxable as salary or perquisite. - Tax Treatment for Partial Withdrawals
Partial withdrawals up to 25% of an employee’s own contributions from the individual corpus are exempt under Section 10(12B) [Schedule III Table: Sl.No 4 of the Income Tax Act, 2025]. - Tax Treatment for Corpus Transfers at Retirement
Transfers from the individual corpus to the pool corpus at retirement are not taxable under Section 80 CCD(6) [Section 124(12) of the Income Tax Act, 2025], as they are deemed not received by the employee. - Tax Treatment for Lump-Sum Payments at Retirement
Lump-sum payments, calculated at 10% of monthly emoluments per six months of qualifying service, are fully exempt under Section 10(12AB) [Schedule II Table: Sl.No 16 of the Income Tax Act, 2025]. - Tax Treatment for Withdrawals at Retirement
Employees can withdraw up to 60% of their individual corpus or benchmark corpus (whichever is lower) at retirement, exempt under Section 10(12AA) [Schedule II Table: Sl.No 15 of the Income Tax Act, 2025]. - Tax Treatment for Excess Corpus
If the individual corpus exceeds the benchmark corpus, 60% of the excess is exempt under Section 10(12AA), while the remaining 40% is taxable under the head “Salaries.” - Tax Treatment for Monthly Pension Payouts
Monthly pension payouts under UPS are taxable as “Salaries.” - Tax Treatment for Family Pension Payouts
Monthly family pensions received by a deceased employee’s spouse are taxable as “Income from other sources.”
Illustrative Examples
The FAQs include two examples to clarify tax treatments at retirement:
- Example 1: An employee with monthly emoluments of Rs 3,00,000, 25 years of service, an individual corpus of Rs 2,00,00,000, and a benchmark corpus of Rs 1,80,00,000 receives Rs 20,00,000 as excess corpus. They withdraw Rs 1,08,00,000 (60% of the benchmark corpus). The lump-sum payment of Rs 15,00,000 (10% of emoluments per six-month period) is exempt under Section 10(12AB). Of the Rs 20,00,000 excess, Rs 12,00,000 (60%) is exempt under Section 10(12AA), while Rs 8,00,000 is taxable under “Salaries.” The Rs 1,08,00,000 withdrawal is exempt, and the transfer of Rs 72,00,000 (40% of the remaining corpus) to the pool corpus is non-taxable.
- Example 2: An employee with monthly emoluments of Rs 3,00,000, 30 years of service, an individual corpus of Rs 2,00,00,000, and a benchmark corpus of Rs 2,20,00,000 withdraws Rs 1,20,00,000 (60% of the individual corpus). The lump-sum payment of Rs 18,00,000 is exempt under Section 10(12AB). The withdrawal is exempt under Section 10(12AA), and the transfer of Rs 80,00,000 (40% of the remaining corpus) to the pool corpus is non-taxable.
Employees are encouraged to review the FAQs, available at https://financialservices.gov.in/beta/sites/default/files/2025-09/FAQs-on-tax-treatment-under-Unified-Pension-Scheme-UPS.pdf, to understand these tax benefits and make informed decisions before the opt-in deadline of September 30, 2025. The UPS aims to provide a structured pension framework, leveraging NPS tax benefits while offering flexibility for central government employees and retirees.
– global bihari bureau
