NPS is a market-linked defined contribution scheme that helps you save for retirement. It was introduced by the Central Government to help individuals have an income in the form of a pension to take care of their retirement needs. The scheme is simple, voluntary, portable, and flexible. It is one of the most efficient ways of boosting your retirement income and saving tax. It allows you to plan for a financially secure retirement with systematic savings in a planned way. The Pension Fund Regulatory and Development Authority (PFRDA) regulates and administers NPS under the PFRDA Act, 2013.

NPS is available to all citizens of India and offers different models depending on the following user segments. As per the notification of the Ministry of Finance dated 5/7-2003-ECB-PR dated 22nd December 2003, NPS is mandatory for Central Government employees who joined service on or after January 1, 2004, except for those in the armed forces, and is also extended to the employees of Central Autonomous Bodies from the said date. It is also available to all State Government employees/ employees of State Autonomous Bodies, if the respective State/UT opted for it.

NPS can be voluntarily adopted by corporates for their employees, and contributions are made to the NPS account as per the terms of employment. The NPS voluntary model is available to all the citizens of India, including those residing abroad, between the ages of 18 and 70 years.

The Unified Pension Scheme (UPS) has been introduced as an option under the National Pension System (NPS) by the Central Government for the Central Government employees covered under NPS so that they may receive an assured payout after their retirement. It is a ‘fund-based ’ payout system which relies on the regular and timely accumulation and investment of applicable contributions (from both the employee and the employer(the Central Government) to grant a monthly payout to the retiree.

Since UPS is mostly available to Central Government Employees at the moment, the real differentiation between NPS & UPS is also relevant for them only. For the rest of the world, NPS still remains the main scheme they can opt for. The main layer of benefit offered under UPS is the assured retirement payout. The rate of full assured payout will be @50% of 12 monthly average basic pay, immediately prior to superannuation. Full assured payout is payable after a minimum of 25 years of qualifying service. In case of a lesser qualifying service period, a proportionate payout would be admissible. A minimum guaranteed payout of Rs. 10,000 per month shall be assured in case superannuation is after 10 years or more of qualifying service, subject to timely and regular credit of contributions and no withdrawals. In cases of voluntary retirement after a minimum of 25 years of qualifying service, assured payout will commence from the date on which the employee would have superannuated if he had continued in service.

Tax benefits available under both schemes are below:

Tax benefits to employees on Self-Contribution

    80CCD and 80CCE - 1,50,000

    80CCD Amount - 50,000

Tax benefits to employees on the Employer's contribution

    80CCD(2) 10% of salary (Basic + DA) contributed by employer

    80CCD(2) 14% for Central Government employees

Tax benefits to the self-employed

    80CCD(1) 20% of Gross Salary up to 1.5 Lakhs under 80CCE

    80CCD(1B) 50,000 above 1.5 Lakhs under 80CCE

Tax Benefits on Partial Withdrawal

    10(12B) Up to 25% on self-contribution

From a taxation point of view, in the present scheme of things, NPS gets covered under the EEE regime, whereas there is no clarity regarding the taxation of the lump sum amount to be received under UPS. This can result in a lower payout. Employees have to see if they are willing to take this hit.

Having understood the basic construct of the scheme, let us understand the key difference between the schemes under the following heads:

Contribution to the scheme: Employee contribution stands at 10% of basic salary + dearness allowance in cases of UPS versus NPS, where the employee needs to contribute a minimum of 6000 per annum, while there is no upside to contribution will also be 10% of (basic pay + Dearness Allowance). Further, the Central Government shall provide an additional contribution of an estimated 8.5% of (basic pay + Dearness Allowance). The additional contribution is for supporting assured payouts under the UPS option. There’s no fixed minimum employer contribution to NPS. Employers typically contribute a percentage of the employee’s Basic + Dearness Allowance (DA), with a common range of 10% to 14%. Some employers may choose to match employee contributions up to a certain limit. The maximum employer contribution, including contributions to Provident Fund (PF), Superannuation, and NPS, is capped at ₹7.5 lakh.

 Investment Option available - Under NPS investor has two options:

2a. Active Choice: In this type of investment choice, subscribers have the right to actively decide how their contributions to be invested, based on personal preference. The Subscribers have to select PFM as well as the percentage allocation for each asset class, as per their preference. The percentage allocation needs to be specified by the subscriber for the selected Asset class.

There are four Asset Classes available for selection in Active Choice as mentioned below:

● Asset class E - Equity and related instruments

● Asset class C - Corporate Bond and related instruments

● Asset class G - Government Securities and related instruments

● Asset Class A - Alternative Investment Funds, including instruments like CMBS, MBS, REITS, AIFs, Etc.

Auto Choice: Lifecycle Fund NPS offers an easy option for those Subscribers who do not have the required knowledge to manage their NPS investments.

● In this option, the investments will be made in a life-cycle fund. Here, the proportion of funds invested across three asset classes will be determined by a pre-defined portfolio (which would change as per the age of the Subscriber).

● A Subscriber who wants to automatically reduce exposure to more risky investment options as he/she get older, Auto Choice is the best option. As age increases, the individual’s exposure to Equity and Corporate Debt tends to decrease.

● Depending upon the risk appetite of the Subscriber, there are three different options available within ‘Auto Choice’ – Aggressive, Moderate, and Conservative.

On the other hand, the pension corpus under the UPS will be split into two funds -

● This fund will consist of the employee's contribution of 10% of basic pay and dearness allowance, and a matching government contribution of 10%.

● The additional 8.5% contribution by the government will be pooled in a separate corpus.

● Employees can choose how and where to invest their individual corpus. However, the assured pension will be based on the default investment pattern as notified by the PFRDA.

● Employees will be allowed to withdraw up to 60% of their individual pension corpus, thereby reducing their assured pension proportionately.

● If the investment chosen by the employee provides a higher annuity than the assured amount, they will receive a higher payout. On the contrary, if the investment made by the employee yields a lower annuity, the government will make up for the difference, subject to the benchmark annuity level.

Investment Growth - Given the higher flexibility and option of taking higher-risk investors with higher risk appetite tend to benefit more under the NPS investment option. Also, savvy investors have the flexibility to increase or decrease their contributions under NPS, given the market situation as well. UPS offers a more stringent investment norm for the investor, plus the employee has to match the maturity, leaving little room to experiment and take higher risks. Contributions to the scheme are also largely defined and hence, reduced flexibility. Clearly, NPS has the edge specifically for the young contributors who have a long-term horizon for themselves.

Maturity benefits - The Ability to purchase an annuity is a factor of the retirement corpus one has accumulated. Having said that, UPS offers assurance by the central government on minimum pension; this feature itself is a big relief for a marginal investor. The rate of full assured payout will be @50% of 12 monthly average basic pay, immediately prior to superannuation. Full assured payout is payable after a minimum of 25 years of qualifying service. In case of a lesser qualifying service period, a proportionate payout would be admissible. A minimum guaranteed payout of Rs. 10,000 per month shall be assured in case superannuation is after 10 years or more of qualifying service, subject to timely and regular credit of contributions and no withdrawals. In case of voluntary retirement after a minimum of 25 years of qualifying service, the assured payout will commence from the date on which the employee would have superannuated if he had continued in service. These features make UPS a no-brainer for an average investor.

Overall, NPS scores better on flexibility, simplicity, and tax efficiency. However, the assured pension option is a no-brainer and will protect a large part of the investor pool from any kind of malpractices.

About the Author

Sachin Jain is the Managing Partner at Scripbox, bringing over 20 years of experience in wealth management. He has worked with top financial institutions like HDFC Bank, ABN AMRO, CITI SMITH BARNEY, and Standard Chartered Private Banking. In 2015, he founded Mymoneygain Consultants, which later partnered with Scripbox. A NISM & CRISIL Certified Wealth Manager, he helps high-net-worth clients with investment planning. Beyond his work, Sachin is actively involved in BNI, JITO, and Goonj, supporting community initiatives. With a strong focus on both finance and social impact, he is dedicated to helping people grow and manage their wealth effectively.