DFS Issues FAQs on Tax Treatment Under Unified Pension Scheme (UPS); NPS Tax Benefits Extended

Source: PIB

The Department of Financial Services (DFS) has released comprehensive FAQs on the tax treatment of the Unified Pension Scheme (UPS). The scheme, notified by the Ministry of Finance on 24 January 2025 through Notification No. F. No. FX-1/3/2024-PR, will be applicable to:

• All new Central Government recruits joining on or after 1 April 2025
• Existing Central Government employees under NPS, who can choose to migrate to UPS

The PFRDA (Operationalisation of UPS under NPS) Regulations, 2025 were issued on 19 March 2025.

To help employees make an informed decision, DFS has clarified the tax benefits available under UPS. Employees and past retirees under NPS can opt into UPS until 30 September 2025.

FAQs

Source: FAQs on Tax Treatment

Q.1 What is the tax treatment for the contributions made by the Central Government to the Individual corpus of the subscribers under the Unified Pension Scheme (UPS)? 

Ans: Ans: The Central Government contributes 10% of Basic Pay + Dearness Allowance every month to your individual corpus. This amount qualifies for tax deduction under Section 80CCD(2) of the Income Tax Act, 1961 [Section 124(1) of the IT Act, 2025] as UPS functions within the NPS framework.

Q.2 What is the tax treatment for the employee’s contributions towards the UPS?

Ans: Employees can also contribute up to 10% of their monthly emoluments (Basic Pay + Dearness Allowance). This amount is eligible for deduction under Section 80CCD(1) of the IT Act, 1961 [Paragraph 1(y) of Schedule XV of the Income Tax Act, 2025].

Q3. What is the tax treatment of the Central Government’s contribution to the pool corpus (8.5% of Basic Pay + DA)?
Ans: The Central Government also contributes 8.5% of monthly emoluments directly to the pool corpus. Since this contribution is not part of the individual employee’s corpus, it is not treated as income in the hands of employees and is not taxable.

Q.4 Is the amount partially withdrawn by a subscriber from their individual account/corpus under the Unified Pension Scheme (UPS) taxable?

Ans: Employees can withdraw up to 25% of their own contributions from the individual corpus. This withdrawal is exempt from tax under Section 10(128) of the IT Act, 1961 [Schedule III Table: Sl.No 4 of the Income Tax Act, 2025].

Q.5 Upon superannuation or retirement, an employee under the Unified Pension Scheme (UPS) is required to authorise the transfer of the value or units from their individual corpus to the pool corpus. What is the tax treatment of such a transfer within the UPS? 

Ans: The transfer of the individual corpus to the pool corpus at the time of retirement or superannuation is not treated as income in the hands of employees. Therefore, it is not taxable under Section 80CCD(6) of the IT Act, 1961 [Section 124(12) of the Income Tax Act, 2025].

Q.6 Is income tax payable on the lump sum payment received from the Unified Pension Scheme (UPS) at the time of retirement?

 Ans: The lump sum payment, calculated as 10% of monthly emoluments (Basic Pay + Dearness Allowance) for every six months of qualifying service, is completely exempt from income tax under Section 10(12AB) of the IT Act, 1961 [Schedule II Table: Sl.No 16 of the Income Tax Act, 2025].

Q.7 A subscriber under the Unified Pension Scheme (UPS) is allowed to withdraw a portion of the individual corpus at the time of retirement. Is this amount taxable?

 Ans: At retirement, employees can withdraw up to 60% of the individual corpus or the benchmark corpus, whichever is lower. This withdrawal is exempt from tax under Section 10(12AA) of the IT Act, 1961 [Schedule II Table: Sl.No 15 of the Income Tax Act, 2025].

Q.8 An employee can exercise investment choices for the Individual Corpus. If the Individual Corpus exceeds the Benchmark Corpus for a particular employee, the excess amount is credited to the employee in lumpsum. Is this excess amount taxable?

Ans: Yes, partly. Up to 60% of the excess over the benchmark corpus is exempt under Section 10(12AA). The remaining 40% of the excess is taxable and added to the employee’s income.

Q.9 What is the tax treatment for payouts received by an employee under UPS?

 Ans: Monthly payouts under UPS are treated as pension. They are taxable as “Salary” income in the hands of employees.

Q.10 What is the tax treatment for payouts received by the spouse of the deceased employee who was under UPS?

Ans: The monthly family payouts paid to the spouse of a deceased UPS subscriber are treated as Family Pension. These payments are taxable in the hands of the spouse and should be declared under the head “Income from Other Sources” in the spouse’s income-tax return.

Illustrative Example 1

Scenario (At Retirement):

• Monthly emoluments (Basic Pay + DA): ₹3,00,000
• Period of service: 25 years
• Individual Corpus (IC): ₹2,00,00,000
• Benchmark Corpus (BC): ₹1,80,00,000
• Excess of IC over BC: ₹20,00,000 (credited to employee in lumpsum)
• Withdrawn amount: ₹1,08,00,000 (60% of BC, i.e., 60% of ₹1.80 crore)
• No partial withdrawals during service.
  

Tax Treatment:

1. Lump Sum Payment (Gratuity-like benefit):
   Calculated at 10% of monthly emoluments for every completed six months of service.
   *(10% × ₹3,00,000 × 25 × 2) = ₹15,00,000
   *Entirely exempt under Section 10(12AB).
2. Excess of IC over BC (₹20 lakh):
   • 60% (₹12 lakh) exempt under Section 10(12AA).
   • Remaining 40% (₹8 lakh) taxable under the head “Salaries”.
3. Corpus Withdrawal (₹1.08 crore):
   Fully exempt under Section 10(12AA).
4. Remaining 40% of IC (₹72 lakh) transferred to Pool Corpus:
   Not taxable, as per Section 80CCD(6).

Net Impact: Only ₹8 lakh is taxable as salary income; the rest is exempt.

Illustrative Example 2

Scenario (At Retirement):

• Monthly emoluments (Basic Pay + DA): ₹3,00,000
• Period of service: 30 years
• Individual Corpus (IC): ₹2,00,00,000
• Benchmark Corpus (BC): ₹2,20,00,000
• IC is less than BC → No excess credited.
• Withdrawn amount: ₹1,20,00,000 (60% of IC, since IC < BC)
• No partial withdrawals during service.

Tax Treatment:

1. Lump Sum Payment (Gratuity-like benefit):
   (10% × ₹3,00,000 × 30 × 2) = ₹18,00,000
   * Fully exempt under Section 10(12AB).
2. Corpus Withdrawal (₹1.20 crore):
   Fully exempt under Section 10(12AA).
3. Remaining 40% of IC (₹80 lakh) transferred to Pool Corpus:
   Not taxable under Section 80CCD(6).

Net Impact: No taxable income arises in this case.

Tax Comparison under Unified Pension Scheme (UPS)