New Income Tax Bill: The central government has also included the tax exemptions and essential facilities given in the National Pension Scheme (NPS) in the newly launched Unified Pension Scheme (UPS). There is no proposal under consideration to restore the Old Pension Scheme (OPS) for central employees.
The central government has also included the tax exemptions and essential facilities given in the National Pension Scheme (NPS) in the newly launched Unified Pension Scheme (UPS). For this, necessary amendments have been included in the new Income Tax Bill-2025 (No. 2). Under this, now 60% of the lump sum amount received at the time of retirement in UPS will also be tax free.
These amendments will come into effect from the financial year 2025-26. This change will specifically apply to those central government employees who opt to shift from NPS to UPS before 30 September 2025. The new provisions have been incorporated in Section-10 (Subsections 12A, 12B and 12AB) of the Income Tax Act.
Apart from this, a new subsection (6) has also been added to section 80CCD of the Income Tax Act. It is worth noting that UPS was implemented from 1 April 2025. This step was taken after the demand of employee unions across the country, in which it was said to restore the system of giving fixed pension like the Old Pension Scheme (OPS).
Tax experts say that this move will provide the same tax benefits to employees opting for UPS as are already available in NPS. This will give them more financial benefits at the time of retirement.
No restoration of OPS
With this, the government has again clarified that there is no proposal under consideration to restore the Old Pension Scheme (OPS) for central employees. Finance Minister Nirmala Sitharaman gave this information in response to a question in the Lok Sabha.
Along with this, while explaining the reason behind closing OPS, he said that the old pension scheme had an unbearable fiscal liability on the government treasury, due to which the government distanced itself from OPS and implemented NPS.
These changes were incorporated in UPS
1. Tax-free withdrawals on retirement
Employees covered under UPS can withdraw up to 60% of their pension corpus in lump sum at the time of retirement, voluntary retirement or superannuation (retirement at a specified age). No income tax will be payable on this. This system is also applicable in NPS.
2. Lump sum on superannuation
At the time of superannuation, the member will receive 10% of his monthly salary (basic pay + dearness allowance) for every six months of eligible service as a lump sum. This too will be tax free. This payment will not reduce his assured monthly pension.
3. Tax on early withdrawal
If an employee or his nominee withdraws money from the UPS account before retirement or superannuation, the entire amount withdrawn will be treated as income and taxable in the same financial year.
4. Exit the plan or close the account
If a member closes the UPS account or exits the scheme before retirement, the entire amount withdrawn (including interest and investment earnings) will be taxable in full that year.
5. Transferring funds to purchase pension
At the time of retirement, if the balance amount is invested in a ‘pooled corpus’ to purchase a pension plan (annuity), it will not be taxable.
6. Rules at the age of 60
When the member turns 60 years old, he can withdraw 60% of the pension fund tax free. The remaining 40% will have to be used to buy a pension plan (annuity).
