The Central Government has announced a new pension scheme for government employees called the Unified Pension Scheme (UPS). The UPS will provide an assured pension scheme to benefit 23 lakh central government employees. The government has announced the UPS due to employee backlash regarding lower corpus and lower returns from the National Pension System (NPS) and the withdrawal of the Old Pension Scheme (OPS).
The UPS, announced by the government, has some significant differences from the OPS.
Unified Pension Scheme (UPS) for central government employees approved: 5 important things to know
Know the five key differences between UPS and OPS
1. Basis of calculation of assured pension changes: Both the UPS and OPS offer assured pensions to government employees. However, there is a difference between the two schemes in how pensions are calculated. Under the OPS, the assured pension was fixed at 50% of the last drawn basic salary + dearness allowance (DA). However, under the UPS, the assured pension will be the average basic salary+DA drawn in the previous 12 months before superannuation. This would mean that government employees, at retirement, will get 50% of the average of the last 12 months’ salary + DA. This means that if an employee is promoted to a higher pay scale for the last few months of his tenure with the government, then he/she will not get 50% of the last pay drawn but a slightly lower amount as it would be 50% of the average of the last 12 months.
2. Employees will have to contribute to UPS: Under the UPS, an employee is required to contribute to the pension fund. This is similar to an employee’s contribution to the National Pension System (NPS). According to a report by The Times of India, employees must contribute 10% of their basic pay and dearness allowance to UPS. The government will also contribute to the UPS, which will increase from 14% (currently contributed to NPS) to 18.5%. Under the NPS, the government currently contributes 14%, whereas employees contribute 10% to NPS. Under the OPS, the employee did not contribute. Due to this, the old pension scheme was fiscally unsustainable in the long run, according to media reports.
3. Tax benefits: A central government employee is currently eligible for tax benefits for the government’s contribution to the NPS scheme. A deduction of 14% is available under both old and new tax regimes under the Income-tax Act 1961 for government employees (both central and state government employees). As there was no employee contribution to the OPS, no tax benefits were available. The government needs to clarify if employee and government contributions are available for any tax benefits.
4. Higher assured minimum pension in UPS: The UPS offers an assured minimum pension of Rs 10,000 per month at the time of retirement after a minimum of ten years of service. According to the government’s pensioners portal, the minimum pension is presently Rs 9,000 per month after ten years of minimum service.
5. Lumpsum payment without reduction of pension/Commutation of pension: The Unified pension scheme offers lump sum payment at the time of superannuation. The lumpsum payment will be calculated as 1/10th of monthly emoluments (Pay + DA) as on the date of superannuation for every six months of service completed. This payment will not reduce the quantum of assured pension, as per the government’s press release. This appears to be better than the OPS because under the latter, lump sum could be taken at the time of retirement only via commutation of pension which reduced the pension amount.
Under the old pension scheme, a central government servant can commute a portion of pension, not exceeding 40%, into a lump sum payment. No medical examination is required if the option is exercised within one year of retirement. If the option is exercised after the expiry of one year, he/she will have to undergo a medical examination by the specified competent authority.
Lumpsum payable is calculated with reference to the Commutation Table. The monthly pension will stand reduced by the portion commuted and the commuted portion will be restored on the expiry of 15 years from the date of receipt of the commuted value of pension. Dearness Relief, however, will continue to be calculated on the basis of the original pension (i.e., without reduction of commuted portion).
The formula for arriving for commuted value of Pension (CVP) is: CVP = 40 % (X) Commutation factor* (X) 12.
The common feature between OPS and UPS
One common feature between OPS and UPS is the availability of inflation-indexed pension to compensate for the rising cost of living. Under the OPS, the pension for retirees is revised twice a year—on January 1 and July 1—whenever the government announces a hike in dearness allowance and dearness relief.
Under the UPS, inflation indexation will be applied to the assured pension, the assured family pension, and the assured minimum pension. Dearness Relief based on All India Consumer Price Index for Industrial Workers (AICPI-IW) as in case of service employees will be given in UPS, as per the government announcement.