Tax Exemption: Now you will get tax exemption on UPS scheme too, government announced

Big decision of the central government! The new Unified Pension Scheme (UPS) will also provide the same tax benefits as NPS. Know what UPS is, how it can be different from NPS, and which of these two schemes should you choose. Understand the complete analysis here.

Tax Exemption: The government has taken a very big and important decision regarding pension for central employees. Till now, employees who were understanding the nuances of the National Pension System (NPS), now a new option has come for them – Unified Pension Scheme (UPS). And to make this new scheme attractive, the government has announced that all the rules of tax exemption will be applicable in it as well as those of NPS.

This news is not just a circular, but a big step that will affect the retirement planning of lakhs of employees. But what is this UPS? How is it different from NPS? And the biggest question – which scheme should you choose from these two?

Let’s decode every aspect of the pension scheme today and know what impact this decision of the government will have on your pocket and your future.

First understand what is National Pension System (NPS)?

Before understanding UPS, it is important to know what NPS is. NPS, i.e. National Pension System, is a retirement savings scheme for central government employees (recruited after 1 January 2004).

How does NPS work?

In this, the employee deposits 10% of his basic salary and the government contributes 14% from its side. This entire money is invested in a pension fund and a large corpus is created at the time of retirement.

The ‘Mahamantra’ of tax exemption in NPS

NPS is known for its three-tier tax exemption, also known as EEE (Exempt-Exempt-Exempt) status.

Section 80CCD(1)

You can get a deduction of up to ₹1.5 lakh by investing up to 10% of your salary (this falls within the limit of 80C).

Section 80CCD(1B)

This is the biggest trump card of NPS. You can get separate tax exemption by investing an additional ₹50,000 over and above ₹1.5 lakh.

Section 80CCD(2)

The 14% contribution made by the government also does not add to your taxable income.

Now a new player has come: What is Unified Pension Scheme (UPS)?

The government felt that there is a need to give better and flexible options to the employees. For this purpose, the Ministry of Finance issued a notification on 24 January 2025 and introduced the Unified Pension Scheme (UPS). It has been implemented as an option under NPS from 1 April 2025.

This means that now central employees will have a one-time opportunity to choose whether they want to stay in the existing NPS or adopt the new UPS. PFRDA also issued rules on 19 March 2025 to implement it.

Big announcement of the government: UPS will also get the same tax benefits as NPS

Initially there was a dilemma whether UPS will also get the same tremendous tax exemption as NPS? To end this dilemma, the government made it clear on July 4, 2025 that all the tax benefits available under NPS will be applicable on UPS as well ‘mutatis mutandis’ i.e. exactly without any change.

What does this mean for you?

If you choose the new UPS scheme, you will still be able to:

Avail tax exemption of up to ₹1.5 lakh (under 80C limit).

An additional tax exemption of ₹50,000 (under 80CCD(1B)) is also exempt from tax.

The government has taken this step to ensure that no employee hesitates to choose UPS just because of tax rules.

The biggest question: What should you choose – NPS or UPS?

Now that the tax rules are the same for both, this question becomes even more important.

Basis for decision

Now your decision will depend on what other features UPS offers differently and better than NPS. Such as:

Investment options

Does UPS have more flexible options for fund managers and asset allocation (equity, debt, government securities)?

Withdrawal rules

Are the rules for withdrawing money at the time of retirement or before it simpler than NPS?

Annuity

Are there any new and better options for buying annuity in UPS?

The government has brought both of them on a par in terms of tax and has ensured that your decision is completely based on the features of the scheme and your personal needs, and not on the compulsion to save tax.

What is the conclusion of the whole news?

The government’s decision to provide the same tax exemption benefits to UPS as to NPS is a welcome and big step towards pension reforms. This shows that the government does not want to keep the employees tied to just one scheme, but wants to give them the freedom to choose the best option according to their needs. Now, the ball is in the employees’ court to wait for UPS’s features to come out, compare the two, and then decide which scheme will prove to be the ‘golden egg’ for their retirement.

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