Govt amends income tax law to ensure parity between NPS, UPS

NPS, UPS at par on tax treatment post amendment to the Income Tax Act, 1961

The government has taken a step towards aligning the tax treatment of the Unified Pension Scheme (UPS) with that of the National Pension System (NPS).

Finance Minister Nirmala Sitharaman on August 11 tabled the Taxation Law (Amendment) Bill, 2025, in the Lok Sabha and it was passed subsequently. The amendments to the Income-tax Act, 1961, will come into force from 2025-26, the current fiscal year, and are relevant for central government employees who choose to switch to UPS from NPS before September 30, 2025.  UPS was implemented from April 1, 2025, following demands from employees' unions across the country to bring back the old pension scheme (OPS) that offered assured pensions.

Section 10 (specifically, subsections 12A and 12B) facilitates tax exemption to UPS subscribers on the payout received from individual corpuses—maximum 60 percent—at the time of their superannuation, voluntary retirement or retirement. “…any payment from the National Pension System Trust to an assessee, who is a subscriber to the Unified Pension Scheme, to the extent that it does not exceed sixty per cent of the individual corpus…made at the time of his superannuation or voluntary retirement or retirement…” states the amendment to the act.

Also read: UPS vs NPS: Which is better for you?

A new clause (12AB) has been added to Section 10 to provide for an exemption for any large amounts of money received at retirement. “This exemption is for the lump-sum payment allowed to central government employees on superannuation at the rate of 10 percent of monthly emoluments,” said Naveen Wadhwa, vice-president, research and advisory, Taxmann, a tax consultancy firm.

The objective is to bring in tax parity. “The purpose of this amendment is to ensure all tax benefits available under the NPS shall apply to the UPS, which was implemented from April 1, 2025. It exempts any withdrawal from the NPS Trust under the UPS to the extent that it does not exceed 60 percent of the individual corpus from income tax,” said SR Patnaik, partner (head, taxation) at law firm Cyril Amarchand Mangaldas.

Like in the case of NPS, 60 percent of the corpus at the time of vesting can withdrawn tax-free at one go. “Essentially, the tax benefits provided to NPS have to be extended to UPS subscribers as well, that is the objective of these amendments. So payouts at retirement or superannuation as well as partial withdrawals will be eligible for tax exemption under UPS,” said Sumit Shukla, MD and CEO, Axis Pension, an arm of Axis Bank.

Also read: Retired govt NPS subscribers with minimum 10 years can claim additional benefits under UPS

Any amount transferred from the individual’s corpus to the pool at retirement will not be taxable, the bill has clarified. “The newly-inserted subsection (6) to Section 80CCD clarifies that for the purpose of computing the taxable withdrawal under subsection (3A), any amount transferred from an individual’s NPS corpus to the pool corpus on account of superannuation, voluntary retirement or retirement…shall not be considered as ‘amount received’ by the assessee in that year,” said Wadhwa.