In India, the retirement planning ecosystem has undergone a significant transformation over the past two decades, thanks to the aim of serving different segments with diverse pension schemes. The moment an employee begins exploring smart retirement plans, three options would usually be encountered first - the traditional Old Pension Scheme, the National Pension Scheme, and the recently introduced Unified Pension Scheme.
This range reflects the government's ongoing effort to balance fiscal sustainability with adequate retirement security. However, the range of options can often cause confusion, leading to analyses such as UPS vs NPS vs OPS, with the goal of determining which to choose. Let’s explore the distinguishing aspects, principles of contribution, and benefits of the three prominent pension schemes, to help you make informed decisions about your retirement plans.
What is the Unified Pension Scheme (UPS)?
The Unified Pension Scheme is the latest initiative of the government to address the retirement security of central government employees while maintaining fiscal prudence. It was introduced as a comprehensive solution effective from April 1, 2025. It targets Central Government employees who were covered under the existing NPS framework. One of the most critical factors that makes it effective is the predictable payout. Under the UPS, the government aims to satisfy this by offering an assured, inflation-indexed pension with adequate retirement benefits.
UPS operates on a defined benefit model, which guarantees pension payout at 50% of the last 12 months of basic average pay, provided that the subscriber has a minimum qualifying service period of about 25 years. This ensures that career-long government employees receive substantial retirement income.
Moreover, there is also a minimum pension of ₹10,000 per month for those who have served at least 10 years, with proportional payouts for service of 10-25 years. Family pension provision under the Unified Pension Scheme also extends to 60% of the subscribers' admissible payout to their legally wedded spouse on the day of retirement, to account for surviving family members.
What is the National Pension Scheme (NPS)?
The NPS was launched by the government of India in 2004 under the regulatory oversight of the Pension Fund Regulatory and Development Authority (PFRDA). It was initially designed as a mandatory retirement solution for central government employees. Over the years, it has evolved into a comprehensive pension structure often adopted by state governments and private employers for their employees. Today, the scheme has expanded significantly to include voluntary participation by any Indian citizen, including residents, non-residents and overseas citizens, aged between 18 and 70 years.
The NPS distinguishes itself as one of the lowest-cost pension schemes, making it attractive in terms of retirement plans across diverse income segments, particularly due to its flexibility, simplicity, and portability. Moreover, subscribers also have the option to choose how their contributions are invested, in government bonds, alternative assets or equities.
At retirement, 60% of the accumulated corpus can be withdrawn as a lump sum. The remaining can be invested in annuity products to generate regular pension income, thereby creating a hybrid balance ensuring long-term income security.
What is the Old Pension Scheme (OPS)?
The Old Pension Scheme, on the other hand, was a traditional pension framework available to government employees who were serving before 2004. Unlike the contribution-based models that are relevant today, this OPS scheme was entirely funded by the government. It offers retirement protection through payments adjusted for inflation.
Under OPS, employees are guaranteed a pension amount for a minimum of 10 years of service, determined by their final average pay and years of service. The retirement plans also ensured comprehensive provision for surviving family members after the unfortunate event of the pensioner's demise.
However, the OPS eventually became fiscally unsustainable, leading to its replacement by the NPS for new government employees from 2004 onwards.
Comparing UPS vs NPS vs OPS
The differences between the three pension schemes are highlighted in the table below:
| | Unified Pension Scheme (UPS)
| National Pension Scheme (NPS)
| Old Pension Scheme (OPS)
|
Eligibility
| Central Government employees.
| Government employees, individuals between 18-70 years, and NRIs.
| Government employees (pre-2004).
|
Employee Contribution
| 10% of basic salary.
| 10% of basic salary.
| NIL – no contribution made by the employee.
|
Employer’s Contribution
| 18.5% of basic salary.
| 14% of basic salary.
| Full government contribution.
|
Family Pension
| 60% of the pension amount that was payable to the subscriber before their demise.
| Depends on the accumulated NPS corpus and the chosen annuity plan.
| Family receives the pension amount after the retiree's demise.
|
Minimum Pension
| ₹10,000/month, for employees who have completed 10+ years of service.
| Returns depend on investment performance.
| ₹9000 per month (for at least 10 years of service),
|
Inflation Protection
| Yes, inflation-indexed, based on the All India Consumer Price Index for Industrial Workers.
| No automatic inflation adjustment.
| Inflation adjustments allowed through hikes in Dearness Allowance (DA).
|
Lump Sum Amount
| 1/10th of the last drawn pay (calculated on the basis of every 6 months of completed service).
| 60% of the corpus can be withdrawn tax-free; rest must be invested in an annuity.
| 40% can be availed as a lump sum.
|
Risk Factor
| Assured returns; there is no risk of market fluctuations.
| Subject to market risk, as NPS investments are market-linked.
| Low to no risk as pension is provided by the government.
|
Flexibility
| Not much scope for flexibility as the pension amount is fixed.
| Flexibility in investment options and strategies.
| Fixed benefits restricting flexibility.
|
Portability
| Not portable; tied to central government employment.
| High portability, can be maintained across different jobs and locations.
| Restricted to government service.
|
Tax Benefits
| Lack of clarity regarding UPS tax benefits; most likely will be the same as NPS taxation.
| Highly beneficial in terms of tax savings: Deductions available under Sections 80CCD(1), 80CCD(1B), and 80CCD(2)
| Pension is fully taxable as income.
|
Which One Should You Choose?
The choice between UPS vs NPS vs OPS primarily depended on an employee's status, knowledge about the market risks, and desire for a guaranteed pension payout. However, currently, government employees are typically preferred to be under the UPS, because of minimal risks and inflation protection. Private sector employees or self-employed individuals, on the other hand, should consider NPS for its flexibility and potential for higher returns through equity exposure, provided they can manage market risks.
A convenient way to strategize for a smart retirement plan is through specialised tools, such as an NPS calculator or a retirement calculator. This calculates your living costs, expenses and savings, taking inflation into account, to help you understand the investment needed to build a strong corpus.
While OPS offered complete security at unsustainable fiscal costs, the NPS provides market-linked growth with associated risk. The UPS, however, attempts to create an optimal middle ground between the two, so that employees now have a clear choice based on their risk tolerance and objectives. Understanding the differences between the schemes can help you make informed decisions years in advance to navigate optimal retirement planning options. Additionally, pairing any pension scheme with life insurance can safeguard your family’s interests in unforeseen circumstances.
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