Government employees have a crucial decision to make before June 2025—whether to continue with the National Pension System (NPS) or opt for the newly introduced Unified Pension Scheme (UPS). Both options come with their own set of features, benefits, and limitations, which can leave many employees puzzled. In this article, we will break down how pensions are calculated under the new UPS model, compare it with the existing NPS, and help you figure out which one might suit you better.
Let’s start with the common ground. Both pension schemes require employees to contribute 10% of their basic salary plus dearness allowance (DA). However, the government's contribution varies under each scheme.
| Feature | NPS (National Pension System) | UPS (Unified Pension Scheme) |
|---|---|---|
| Employee Contribution | 10% | 10% |
| Government Contribution | 14% | 10% |
| Additional Government Support | None | 8.5% (into a special corpus) |
| Equity Investment Cap | Up to 50% | Up to 50% |
| Default Equity Exposure | 25% | 25% |
While both schemes allow up to 50% equity exposure, the default exposure is set at 25% for both. The biggest structural difference lies in how the pension benefits are calculated and disbursed.
Under the NPS, upon retirement, an employee can withdraw 60% of the accumulated corpus as a lump sum, and the remaining 40% is converted into a monthly pension through annuity purchases.
On the other hand, the UPS uses a formula-based approach to determine pension, ensuring a more predictable income stream. Here's how the UPS pension is calculated:
UPS Pension = 50% × P + (Q ÷ 300) + (IC ÷ BC)
P = Average basic salary over the last 12 months
Q = Total number of months in service
IC = Total individual contribution towards pension
BC = A fixed benchmark amount for calculation
This formula provides a guaranteed pension, typically around 50% of your last drawn basic salary, along with benefits from your personal pension fund.
To better understand the financial outcomes of both schemes, let’s take an example.
Suppose an employee works for 25 years, starting with a monthly basic salary of ₹50,000, which increases by 5% annually.
Under UPS:
Estimated monthly pension: ₹84,658
One-time lump sum payout: ₹8.45 lakh
Under NPS:
Estimated total corpus: ₹2.25 crore
Withdrawable lump sum (60%): ₹1.35 crore
Remaining ₹90 lakh used for pension: Monthly pension of ₹86,250
While the NPS offers a larger withdrawal and potential for higher returns based on market performance, UPS provides a fixed and secure pension, ideal for those seeking stability.
Your choice between NPS and UPS should be based on your career plans, risk tolerance, and retirement goals.
| If you… | Best Option |
|---|---|
| Plan to serve in government until retirement | UPS |
| Prefer investment flexibility and higher returns | NPS |
| Might leave government service early | NPS |
| Want guaranteed pension and inflation protection | UPS |
The new Unified Pension Scheme (UPS) brings a structured and secure retirement plan for government employees who prefer a predictable income post-retirement. Meanwhile, the National Pension System (NPS) offers greater flexibility and market-linked returns, making it attractive for employees who are open to calculated risks and may consider alternate career paths.
Whichever path you choose, make sure to evaluate your financial goals, job security, and risk appetite before the June 2025 deadline. A well-informed decision today can ensure a secure and stress-free retirement tomorrow.
