Unified Pension Scheme (UPS) for Government Employees Approved by Modi-Led Cabinet

On Saturday, the Cabinet led by Prime Minister Narendra Modi approved the Unified Pension Scheme (UPS) for government employees. The announcement was made by Information and Broadcasting and Railway Minister Ashwini Vaishnaw during a press briefing. This newly introduced pension scheme is set to benefit 23 lakh central government employees, with an option for state governments to opt in, potentially increasing the number of beneficiaries to 90 lakh.

Key Highlights of the Unified Pension Scheme

The Unified Pension Scheme will be implemented from April 1, 2025, offering central government employees the choice between the National Pension Scheme (NPS) and the newly approved UPS. Current NPS subscribers within the central government will also have the opportunity to switch to the Unified Pension Scheme . According to government officials, most central government employees are expected to find the UPS more beneficial than the NPS, especially since the NPS, introduced on April 1, 2004, is a contribution-based model, unlike the defined benefit scheme available to employees hired before this date.

Salient Features of the Unified Pension Scheme

1. Assured Pension: Employees will receive 50% of their average basic pay drawn over the last 12 months before retirement, provided they have completed at least 25 years of qualifying service. For those with less service, the pension will be proportionate, with a minimum qualifying service of 10 years.
2. Family Pension: In the unfortunate event of an employee’s demise, their family will receive 60% of the pension the employee was receiving.
3. Minimum Pension: A minimum pension of ₹10,000 per month is assured for those retiring with at least 10 years of service.
4. Inflation Indexation: Pensions will be adjusted based on inflation, with Dearness Relief calculated using the All India Consumer Price Index for Industrial Workers (AICPI-W), similar to adjustments for serving employees.
5. Lump-Sum Payment: Upon retirement, employees will receive a lump-sum payment in addition to their gratuity. This payment will be equivalent to 1/10th of their monthly emolument (pay + DA) as of the date of retirement for every completed six months of service, without reducing the assured pension.

Government’s Response to Employees’ Concerns

Minister Vaishnaw emphasized that the Union Cabinet’s decision to approve the UPS was in response to concerns raised by government employees about existing pension schemes. Prime Minister Modi formed a committee, headed by Cabinet Secretary TV Somanathan, to address these issues. The committee engaged in over 100 meetings with various organizations and consulted with nearly all states, as well as the Reserve Bank of India and the World Bank, to ensure a well-informed decision.

According to Kuldip Kumar, Partner at Mainstay Tax Advisors, the new scheme is expected to bring relief to central government employees, as it provides an assured pension for both employees and their families, coupled with the indexation benefit to counter inflation.

Before the introduction of NPS on January 1, 2004, Central Government employees were covered under a defined benefit pension scheme. However, the NPS bases pension payments on the market returns earned over the corpus accumulated through contributions by both the government and the employees. Many employees were dissatisfied with this model, leading to increased demand for a return to a defined benefit scheme, which the UPS now addresses.

Kuldip Kumar highlighted that the UPS might increase the government’s pension liabilities, as payments will no longer be limited to the corpus accumulated by employees during their service.

The introduction of the Unified Pension Scheme marks a significant shift in the government’s approach to employee benefits, aiming to provide more security and predictability for its workforce.

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