The Ministry of Finance on Tuesday notified Unified Pension Scheme (UPS) on providing a new option for retirement planning for the central government employees. The UPS is applicable to all new recruits joining Central Government services on or after April 1, 2025.
The scheme offers a crucial option for existing employees who are currently under the National Pension System (NPS) to switch to the UPS. To assist employees in making an informed decision, the Department of Financial Services (DFS) has released comprehensive FAQs detailing the tax treatment under the new scheme. The last date to opt for the UPS is Sept. 30, 2025. This deadline applies to all eligible employees and past retirees under NPS.
Here are some FAQS, answered.
1. What is the tax treatment for the contributions made by the Central Government to the individual corpus of the subscribers under the UPS?
The central government contributes 10% of monthly emoluments (basic pay + dearness allowance) of the employees to the individual corpus. This contribution is eligible for deduction.
2. What is the tax treatment for the employee's contributions towards the UPS?
The employee's contribution towards UPS, up to 10% of monthly emoluments (basic pay + dearness allowance), is eligible for deduction.
3. What is the tax treatment of the contribution by the government to the pool corpus, which is 8.5% of (basic pay + dearness allowance)?
The additional contribution provided by the central government, amounting to 8.5% of monthly emoluments (basic pay + dearness allowance), is made at an aggregate level basis directly to the pool corpus. This contribution is not towards the individual corpus. Therefore, this contribution is not treated as income in the hands of the employee, neither as salary nor as perquisite and is not chargeable to tax.
4. Is the amount partially withdrawn by a subscriber from their individual account/corpus under the UPS taxable?
The amount partially withdrawn to the extent of 25% of their own contribution from the individual corpus is exempted from tax as UPS is an option under the NPS.
5. Upon superannuation or retirement, an employee under the 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 UPS?
For subscribers to the UPS, any amount transferred from the individual corpus to the pool corpus at the time of superannuation or retirement is deemed not to have been received by the assesses in the relevant previous year. Such transfers within the UPS framework are not taxable as income.
6. Is income tax payable on the lump sum payment received from the UPS at the time of retirement?
The lump sum payment payable to an employee at the time of superannuation or retirement is calculated as 10% of monthly emoluments (basic pay + dearness allowance) for every completed six months of qualifying service.
7. A subscriber under the UPS is allowed to withdraw a portion of the individual corpus at the time of superannuation or retirement. Is this amount taxable?
A subscriber shall have an option to withdraw an amount not exceeding 60% of the individual corpus or benchmark corpus, whichever is lower at the time of superannuation or retirement.
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 lump sum. Is this excess amount taxable?
The amount up to 60% of the individual corpus is exempt from taxation. Accordingly, 60% of the excess of the individual corpus over the benchmark corpus is also exempt. The remaining 40% of the excess amount will be chargeable to tax.
9. What is the tax treatment for payouts received by an employee under UPS?
The amount of monthly payouts received by an employee is in the nature of a pension and hence is chargeable to income tax under the head "salaries".
10. What is the tax treatment for payouts received by the spouse of the deceased employee who was under UPS?
The amount of monthly family payouts is like a family pension, received by the spouse of a deceased employee, who was a subscriber to UPS, is chargeable to tax under the head "income from other sources."
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