NPS vs. UPS: How to choose the right pension scheme

For central government employees, the National Pension System (NPS) is no longer the only option available for retirement savings. With the introduction of the Unified Pension Scheme (UPS), effective from April 1, 2025, there is now an alternative to consider. So, can you choose between NPS and UPS? The answer is yes. You have the option to select between NPS and UPS until September 30, 2025, if you wish to make the switch. Now, the bigger question is: Should you switch from NPS to UPS? The answer is not straightforward and involves various factors. To determine which option—NPS or UPS—might be better suited for your retirement, read this in detail article.

NPS vs. UPS: Understand the basics

What is NPS?

The National Pension System or NPS is a pension scheme to help you build a retirement corpus. While you are employed, you contribute a portion of your salary each month to create this corpus, which will provide a regular income during your retirement. The idea is to develop your own financial support for your golden years. 

To date, NPS remains one of the lowest-cost pension schemes in the world. It’s important to note that the NPS is a market-linked product. When registering for the NPS, you will have the opportunity to choose an investment option that suits your risk profile.

What is UPS?

Introduced earlier this year, the Unified Pension Scheme (UPS) is a new pension scheme on the block. It offers an assured pension for central government employees who complete a certain number of years in service.

UPS is a mix of the Old Pension Scheme (OPS) and NPS. It guarantees a pension, with half of the last annual basic pay paid out each year, and this pension will be adjusted for inflation annually, similar to what OPS used to offer. However, unlike the OPS, where the government had to bear the entire retirement expense, the UPS requires employees to contribute to their retirement corpus as well. This is similar to the existing NPS structure. 

NPS vs. UPS: Eligibility

NPS has been mandatory for central government employees who joined service on or after January 1, 2004, except for those in the armed forces. It was also extended to employees of Central Autonomous Bodies joining on or after January 1, 2004. 

UPS is available for central government employees who have already enrolled in NPS. Remember that the deadline to switch from NPS to UPS is set for September 30, 2025. Moreover, to get the full assured pension—equivalent to half of your last annual basic pay—you must complete a minimum of 25 years of service. If your service period is shorter, you will get a reduced payout.

NPS vs. UPS contributions

For central government employees, here’s how the contributions to NPS work: 

1. Employee contribution: Each month, employees contribute 10% of their salary, which includes their basic pay and the Dearness Allowance. 
2. Employer contribution: The central government adds 14% of the employee’s salary (basic pay+Dearness Allowance) each month to the NPS. 

In total, this means a central government employee contributes 24% of their salary to NPS every month (10% from the employee and 14% from the employer).

Here’s how the contributions to UPS work: 

1. Employee Contribution: Like NPS, employees also contribute 10% of their (basic pay + Dearness Allowance) every month. 
2. Employer Contribution: The central government matches this with another 10% of (basic pay + Dearness Allowance). This money goes into each employee’s individual account. 
3. Additional contribution: The central government also sets aside an additional contribution of about 8.5% of (basic pay + Dearness Allowance) for all employees who choose the UPS. This additional money helps ensure that the promised pension payouts are supported. 

In summary, both systems involve employee and employer contributions, but UPS has an extra layer of government support to ensure guaranteed pensions after your retirement.

NPS vs. UPS: How much pensions will employees get after retirement?

As mentioned earlier, the NPS is a market-linked product, which means that the returns on contributions depend on the performance of investments in the market. So the pension amount you will receive after retirement is dependent on the total corpus you have accumulated. Remember that you can withdraw up to 60% of your total NPS corpus when you turn 60. With the remaining 40%, you have to purchase an annuity that will provide you with a regular pension—monthly, quarterly, half-yearly, or yearly. The interest rate for the annuity will be determined by the rates available at the time of purchase. 

Under the NPS, there is no implicit or explicit assurance of benefits, and investments are subject to market conditions. However, the system is designed to ensure that you can receive a regular pension throughout your retirement.

In contrast, UPS guarantees eligible employees a pension of 50% of their average basic pay over the last one year before retirement, provided they have completed 25 years of qualifying service. For employees with 10 to 25 years of service, the pension is calculated proportionately based on their years of service. 

Another distinction of the UPS is that it guarantees a minimum pension of ₹10,000 per month for employees with at least 10 years of service. 

If an employee chooses voluntary retirement after at least 25 years of service, they will start receiving their guaranteed payout from the date they would have retired if they had stayed in the job.

If the employee passes away after turning 60, their family will receive 60% of the amount the employee was entitled to just before their death. 

UPS pensions are also inflation-protected, meaning that the pension amount is adjusted periodically to account for inflation. This adjustment is made through Dearness Relief (DR), an additional amount added to the pension to help preserve its purchasing power as prices rise over time. DR will be provided on the assured payout and family payout. It will be calculated in a similar way to the Dearness Allowance for active employees and will only be paid once the payout begins.

UPS pensions are also inflation-indexed, meaning that the pension amount is adjusted periodically to account for inflation. This adjustment is made through Dearness Relief (DR), an additional amount added to the pension to help preserve its purchasing power as prices rise over time.

NPS vs. UPS: What are the investment options for employees?

As a central government employee, you have more control over where you invest in the NPS. You can choose your fund managers and determine your asset allocation strategies.

1. Choose a pension fund manager  

There are 11 fund houses in India that manage NPS funds. You can select one of them to manage your NPS investments. Be careful when choosing a fund manager, as each one has different investment strategies.

2. Asset allocation options  

NPS offers three primary asset classes for investment

– Equity (Scheme E): This option involves investing in stocks or shares, mainly in equity markets. It has the potential for higher long-term returns but also comes with significant risks.  

– Corporate Bonds (Scheme C): This asset class includes investing in bonds issued by corporations. These typically provide more stable returns than equities, though they carry some risk based on the issuer’s financial health.  

– Government Securities (Scheme G): Investments in government securities are considered low-risk and offer stable returns since they are backed by the government.  

NPS vs. UPS: Understanding the risks

NS subscribers face two primary risks: market risk and inflation risk. 

1) Market risk: This risk affects the entire investment corpus, as returns depend solely on investment performance. Poor market conditions near retirement can significantly reduce both the final corpus and the pension amount. 

2) Inflation risk: This risk can have a substantial impact because NPS annuities are not inflation-indexed like those in UPS. Prolonged high inflation can greatly erode purchasing power over time. 

For UPS subscribers, the challenge is that you will receive a guaranteed pension only after completing a certain number of years of service, with a minimum requirement of 10 years. While UPS promises stability, it comes with its own concerns. The sustainability of the scheme relies on the government’s ability to manage the pooled corpus effectively and meet guaranteed payout commitments. Additionally, if you choose an alternative investment option, using benchmark corpus methodology may expose you to market fluctuations if the corpus falls short of benchmarks.

NPS vs. UPS: Benefits for family and succession

If the NPS subscriber dies (whether before or after retirement), the entire accumulated corpus is paid to the nominee(s) or legal heir(s). If the death occurs after retirement and an annuity had been purchased, the annuity payouts continue to the spouse if the chosen plan includes this benefit. After both the subscriber and spouse have passed away, the original amount used to purchase the annuity (typically 40% of the corpus, if the ‘Return of Purchase Price’ option was selected) is returned to the nominee(s). This return of annuity corpus is only applicable if the relevant annuity option was chosen at the time of retirement.

UPS offers more predictable family benefits, guaranteeing 60% of the subscriber’s pension to the legally wedded spouse. This provides clearer financial security for families, though the total corpus may be lower than potential NPS accumulations.

NPS vs. UPS: Taxation rules

Under the NPS, when you withdraw 60% of your fund after turning 60, that amount is tax-free. However, the pension you receive from the annuity is taxable for individuals according to their tax slabs.

Employees contributing to the NPS are eligible for the following tax benefits on their own contributions:

1. A tax deduction of up to 10% of salary (Basic + DA) under Section 80CCD(1), within the overall limit of ₹1.50 lakh under Section 80CCE.
2. A tax deduction of up to ₹50,000 under Section 80CCD(1B) in addition to the overall limit of ₹1.50 lakh under Section 80CCE.
3. Tax benefits for employees on employer’s contributions: Employees are eligible for a tax deduction of up to 14% of the salary contributed by the employer under Section 80CCD(2), in addition to the limit of ₹1.50 lakh provided under Section 80CCE.

The  Central Board of Direct Taxes (CBDT) earlier clarified that all the tax benefits currently available under NPS shall apply to the Unified Pension Scheme.

1. The Central government contributes 10% of an employee’s monthly emoluments (Basic Pay+Dearness Allowance) to their individual corpus, eligible for deduction under Section 80CCD(2). 
2. Employee contributions up to 10% of monthly emoluments to the UPS are eligible for a deduction under Section 80CCD(1). 
3. An additional 8.5% of monthly emoluments is contributed to the pool corpus, not taxable as salary for employees. The lump-sum payments at the time of retirement, calculated as 10% of monthly emoluments for each six months of service, are exempt from income tax under Section 10(12AB).

NPS vs. UPS: Which one should you choose?

Choosing between NPS and UPS depends on your income, financial personality and generational profile . If you already have other investments to rely on and you can handle market risk, NPS may give better growth over time. But if you want safety and a assured pension without taking much risk, UPS may be the better choice. The decision between choosing NPS and UPS needs balance based on current savings and life stage. Talking to a Qualified Financial Advisor can help you make the right call for your retirement.

You can consider Pascal’s Wager here—a philosophical argument by Blaise Pascal that suggests it’s safer to choose the option with the least potential loss, even if the probability of an outcome is uncertain. When faced with uncertainty, it is wiser to take the route that offers the best worst-case scenario. You can apply the same reasoning to your retirement corpus: if the UPS feels safer for you, opt for it, even if the NPS may promise higher returns.