NPS vs UPS: Which Pension Scheme is Better for Government Employees?

In India, the pension system for government employees has seen a major change. Earlier, there was the Old Pension Scheme (OPS). Then came the New Pension Scheme (NPS) in 2004, and now the government has introduced the Unified Pension Scheme (UPS) starting from 1st April 2025.

This article will help you understand the following:

1. What is NPS and UPS?

2. Rules, eligibility, tax benefits of NPS and UPS

3. Withdrawal rules from NPS and UPS and interest

4. A full comparison of NPS vs UPS – Which one is better?

1. What is NPS (New Pension Scheme)?

NPS is a market-linked retirement savings plan introduced by the Government of India on 1st January 2004.

Key Features of NPS are:

* Both employee (10%) and government (14%) contribute monthly to employee’s pension fund.

* The money is invested in market instruments like equity, debt, and government bonds.

* You get a PRAN (Permanent Retirement Account Number) to track your account.

* At retirement, you can withdraw 60% of the total corpus as a lump sum (tax-free), and use the remaining 40% to buy an annuity that gives you monthly pension.

There is no guaranteed monthly pension, as it depends on market performance and the annuity plan you choose.

2. What is UPS (Unified Pension Scheme)?

UPS is a new scheme that aims to give NPS-covered government employees a guaranteed monthly pension, just like the old system.

Key Features of UPS are:

* You get 50% of the average Basic Pay + DA (of the last 12 months) as monthly pension if you complete 25 years of service.

* If you complete 10–24 years, you get pro-rata pension (proportional pension).

* Minimum monthly pension is ₹10,000, even if your salary was low.

* You also get a lump sum retirement benefit, based on your years of service.

* Dearness Relief (DA) will be added to your pension every 6 months to protect against inflation.

* Your family will receive 60% of your pension after your death as family pension.

* You cannot choose how your money is invested, and you won’t get a large lump sum like in NPS.

3. Eligibility of NPS and UPS

Criteria	NPS	UPS
Who can join?	Mandatory for Central Govt. employees joining on/after 01.01.2004. Also open to private employees and NRIs.	Only available to existing NPS-covered govt. employees who opt in. Not for private sector.
Minimum service required	No minimum for joining. But 3 years for partial withdrawal.	Minimum 10 years for pension. 25+ years for full 50% pension.

4. Government Contribution

Type	NPS	UPS
Monthly Govt. Contribution	14% of Basic Pay + DA	18.5% of salary (as per Economic Times article)

5. Tax Benefits of NPS and UPS

Section	NPS	UPS
80C	₹1.5 lakh deduction (employee’s contribution)	Expected to be available, but not yet confirmed.
80CCD(1B)	Additional ₹50,000 deduction	Not yet clear.
80CCD(2)	Employer’s contribution (14%) exempt with no upper limit	Likely to follow NPS structure.

NPS offers strong tax benefits for now. UPS tax rules may follow but are not yet fully notified.

6. Withdrawal Rules for NPS and UPS

1. NPS Withdrawal rules

a) Partial Withdrawal:

- Allowed after 3 years.

- Up to 25% of your own contribution (Govt. part not included).

- Maximum 3 times during service.

- Only for specific reasons: child’s education/marriage, buying a house, critical illness.

b) Retirement Withdrawal:

- At 60 years: Withdraw 60% lump sum (tax-free) and use 40% to buy an annuity.

- If you exit before 60: Only 20% lump sum, rest 80% goes to annuity.

c) On resignation:

- Only 20% can be withdrawn.

- 80% must be used to buy an annuity, unless waived in public interest.

2. UPS Withdrawal Rules

a) No partial withdrawals allowed.

b) At retirement, you get:

- Guaranteed pension every month.

- A lump sum based on the length of your service.

- Family pension and DA benefits are included.

- Simple and assured structure.

7. Returns / Interest Rate on NPS and UPS

Key points	NPS	UPS
Returns	Depends on market performance (8–10% historical average)	Fixed pension amount
Investment Control	Yes – choose funds and managers	No control
Inflation Protection	No automatic DA under NPS	DA added every 6 months
Risk	Moderate to High	Very Low to None

8. Family and Death Benefits

Situation	NPS	UPS
On death during service	Family can receive corpus or annuity	Family gets 60% of pension + DA
Disability	Option to switch to old CCS Pension Rules	Full UPS benefits continue if service criteria are met

9. Comparison of NPS and UPS for Better Decision Making

Feature	NPS	UPS
Type	Market-linked Investment	Guaranteed Benefit Plan
Monthly Pension	Not fixed, based on market performance	50% of last Basic + DA
Inflation Protection	No Inflation adjusted return	Inflation adjusted return
Tax Benefits	Strong tax benefits under sec. 80C	Tax benefits not yet cleared by govt.
Risk	Moderate to high market risk	Very Low risk
Investment Control	Yes	No
Withdrawal Flexibility	Partial + Early exit possible	Not allowed
Best for	Those who want tax benefits and growth	Those who want peace of mind with fixed pension

10. Which Scheme Should You Choose?

One should choose UPS is:

a) He want a stable, guaranteed monthly income for life.

b) He plan to work 25 years or more in govt. service.

c) He don’t want to worry about market ups and downs.

One should choose NPS if:

a) He is young and comfortable with investment risks.

b) He want more control over your savings.

c) He is looking for higher tax savings and a bigger lump sum at retirement.

Conclusion

Both NPS and UPS have their strengths and weakness. UPS offers certainty, while NPS offers flexibility and growth potential.

If you are close to retirement and want assured monthly income, go for UPS.

If you’re early in your career and want to build wealth with tax savings, then NPS may work better.