Unified Pension Scheme vs Existing Pension Models: What Makes It Different?
- Editor
- Sep 29
- 4 min read
by KarNivesh | 29 September, 2025
The Indian pension system has gone through major changes over the past two decades. From the guaranteed security of the Old Pension Scheme (OPS) to the market-linked National Pension System (NPS), and now the newly introduced Unified Pension Scheme (UPS) in 2024, employees have witnessed a variety of retirement models.
With the deadline of September 30, 2025 approaching for central government employees to choose their pension system, understanding the differences has become more important than ever. This blog breaks down the features of UPS, NPS, and OPS in simple words so that employees can make informed decisions.
What is the Unified Pension Scheme (UPS)?
Launched on April 1, 2025, the UPS is a hybrid pension model designed to combine the best features of OPS and NPS.
Employees who complete 25 years of service are guaranteed 50% of the average basic salary (plus Dearness Allowance) of the last 12 months before retirement.
Those with at least 10 years of service receive a minimum pension of ₹10,000 per month.
Pension is linked to inflation through the All India Consumer Price Index for Industrial Workers (AICPI-IW).
This ensures financial stability without putting the same heavy burden on government finances as OPS once did.
The National Pension System (NPS)
Introduced in 2004, NPS replaced OPS for new recruits. It is a market-linked retirement plan where both employees and the government contribute.
Employee contributes 10% of basic salary + DA.
Government contributes 14%.
At retirement:
60% of the accumulated fund can be withdrawn tax-free.
The remaining 40% must be used to buy an annuity, which gives a monthly pension.
For example, if someone builds a retirement corpus of ₹50 lakh (earlier shown as $563,800), depending on annuity rates, it might generate a monthly pension of ₹15,000–₹20,000. But this is not fixed — it depends on market performance and annuity providers.
The Old Pension Scheme (OPS)
OPS was the traditional pension plan until 2004.
Guaranteed 50% of the last drawn basic salary + DA as pension.
Funded entirely by the government, with no contribution from employees.
Pension was automatically increased whenever DA increased.
OPS gave employees full security but became financially unsustainable for the government, leading to its discontinuation.
Comparing Contribution Structures
The key difference across schemes is who pays how much.
UPS: Employee 10% + Government 18.5% = 28.5% total contribution.
NPS: Employee 10% + Government 14% = 24% total contribution.
OPS: No contribution from employees, 100% from government.
Example: If salary + DA = ₹50,000/month
UPS: Employee pays ₹5,000, Government adds ₹9,250 → Total ₹14,250.
NPS: Employee pays ₹5,000, Government adds ₹7,000 → Total ₹12,000.
OPS: Employee pays nothing, Government covers full pension.
Pension Calculation Methods
UPS: 50% of the average basic pay of the last 12 months (for 25+ years of service).
NPS: Pension depends on total savings and annuity rates at retirement.
OPS: 50% of the last drawn basic salary + DA (higher if promoted near retirement).
Tax Benefits
During Service
UPS & NPS: Contributions qualify for deductions under Section 80CCD, with additional benefits up to ₹50,000 under Section 80CCD(1B).
OPS: No deductions since employees made no contributions.
At Retirement
UPS: Lump-sum payments (calculated as 1/10th of basic pay + DA for every six months of service) are tax-free, along with 60% corpus withdrawal. Pension income is taxable.
NPS: 60% withdrawal is tax-free, 40% annuity pension is taxable.
OPS: Entire pension was tax-free.
Eligibility & Deadlines
Employees currently in NPS have until September 30, 2025 to switch to UPS.
New recruits after April 1, 2025, must decide within 30 days of joining.
UPS subscribers can switch back to NPS once, but not the other way around.
Minimum Service for UPS: 10 years (₹10,000 monthly guaranteed pension). Full 50% benefit after 25 years.
OPS: Required minimum 10 years.
NPS: No service limit; payout depends on contributions.
Family & Survivor Benefits
UPS: Family pension = 60% of the employee’s pension for spouse, with DA adjustments. Also includes gratuity and death benefits.
NPS: Benefits depend on accumulated corpus and chosen annuity plan.
OPS: Family pension based on last drawn salary.
Market Risk & Investment Choices
UPS: No market risk. Pension guaranteed, government bears investment burden.
NPS: High market exposure (up to 75% in equities). Potentially higher returns, but risk of uncertainty.
OPS: No market risk. Fully government-funded.
Adoption and Challenges
As of July 2025, only about 31,555 employees had chosen UPS — adoption is slow.
States like Maharashtra have already adopted UPS, while others are still evaluating.
Government contribution (18.5% under UPS vs 14% under NPS) means higher fiscal cost, but still more sustainable than OPS.
Who Should Choose What?
Risk-Averse Employees: UPS is ideal, offering guaranteed security and inflation protection.
Growth-Oriented Employees: NPS is better, with higher return potential but market risks.
Traditionalists: OPS is no longer available to new employees, but old beneficiaries continue to enjoy its benefits.
Conclusion
The Unified Pension Scheme is India’s attempt to strike a balance between financial security for employees and fiscal discipline for the government.
It addresses the weaknesses of:
OPS (financial burden on the government), and
NPS (uncertainty due to market risks).
With the September 30, 2025 deadline nearing, government employees must carefully assess their career stage, financial needs, and risk appetite before making a choice.
UPS may not be as flexible as NPS, but it ensures a stable and predictable pension. If widely adopted, and if states follow, it could become a milestone reform in India’s pension landscape.
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