Good news for central govt employees under UPS! NPS tax benefits extended – What Finance Ministry announced

Good news for central govt employees under Unified Pension Scheme (UPS)

Fact NowJuly 4, 2025

National Pension System (NPS) tax benefits extended to Unified Pension Scheme (UPS)

The central government, today, announced that the newly introduced Unified Pension Scheme (UPS), offered as an option under the National Pension System (NPS), will receive the same tax benefits currently available to NPS subscribers.

This move aims to further incentivise Central Government civil service recruits to opt for the UPS, which became effective on April 1, 2025.

“The Department of Financial Services, Ministry of Finance vide its Notification No. FS-1/3/2023-PR dated 24.01.2025 had notified introduction of the Unified Pension Scheme (UPS) as an option under NPS for the recruits to the Central Government civil service w.e.f. 01.04.2025 giving one-time option to the Central Government employees covered under the National Pension System (NPS) for inclusion under the UPS,” the Ministry of Finance said in a statement.

To facilitate the implementation of this new framework, the Pension Fund Regulatory and Development Authority (PFRDA) subsequently issued the PFRDA (Operationalisation of the Unified Pension Scheme under NPS) Regulations, 2025, on March 19, 2025, the release said.

By extending the existing NPS tax benefits “mutatis mutandis” to the UPS, the government ensures parity with the well-established NPS structure.

“These provisions ensure parity with the existing NPS structure and provide substantial tax relief and incentives to employees opting for the Unified Pension Scheme,” the ministry added.

The inclusion of UPS under the tax framework marks another step forward in the government’s effort to strengthen retirement security for Central Government employees through transparent, flexible and tax-efficient options, it further stated.

NPS tax benefits: Explained

The tax benefits available for contributions to the National Pension System (NPS) are determined by the tax regime chosen by central government employees.

Under the Old Tax Regime

The central government employees can avail tax deductions under three distinct sections:

Section 80CCD(1): This section applies to an employee’s personal contributions to the NPS. It falls within the broader limits of Section 80C. The maximum deduction permitted is the lower of 10% of the employee’s basic salary or Rs 1.5 lakh.
Section 80CCD(1B): This benefit is available in addition to deductions claimed under Section 80C. Employees can claim a deduction of up to ₹50,000 for voluntary contributions made to their NPS Tier-I account.
Section 80CCD(2): This section allows a deduction for contributions made by the employer to the employee’s NPS account. Central Government employees can claim a deduction of up to 14% of their basic salary plus Dearness Allowance (DA).

Under the New Tax Regime

In contrast, the new tax regime offers a single tax benefit for NPS contributions:

Section 80CCD(2): This deduction is available for the employer’s contribution to the employee’s Tier-I NPS account. Government employees can claim a maximum deduction of 14% of their basic salary plus DA. It’s important to note that under the new tax regime, there is no tax deduction available for an employee’s personal contributions to their NPS Tier-I account.