Countdown to Sep 30: What every central govt employee must know before choosing UPS over NPS

Understand the nuts and bolts of UPS, NPS before making a choice

The countdown has begun for central government employees who have to choose between the existing National Pension System (NPS) and Unified Pension Scheme (UPS) that came into effect from April 1.

While the original deadline to switch to UPS was June 30, it was extended to September 30 to allow employees more time to make up their minds. Meanwhile, the government and Pension Fund Regulatory and Development Authority (PFRDA) introduced a string of changes to sweeten the UPS deal. Here are the key changes introduced in this financial year (2025-26):

One-time switch from UPS to NPS 

The central government on September 2, 2025 enabled a one-time switch option from UPS to NPS for those who opt for the former before September 30. Such employees can switch to NPS later only once and cannot switch back to UPS. The option must be exercised at least one year before superannuation or three months before voluntary retirement (VRS).

If they do not choose to switch to NPS before these deadlines, they will continue under UPS. To be sure, employees who face removal, dismissal, compulsory retirement as a penalty or in cases where disciplinary proceedings have been initiated, will not enjoy the switch relaxation. “The switch option would provide more flexibility to subscribers in opting for UPS and also help them in planning their post-retirement financial security,” a government release said.

PFRDA allows physical form submissions

With scores of employees rushing to inform the government of their decision and submit their applications online by September 30, the infrastructure could be under pressure. Such employees can opt to submit physical forms. “In case of unavailability of the online system or any technical glitch in the CRA system, we advise physical submission of UPS requests to nodal offices till September 30, 2025. All stakeholders are requested to ensure timely submission to avoid last-minute rush,” the PFRDA said in an official statement earlier this month.

NPS to UPS switch for new employees

The PFRDA on September 14 allowed new government employees who joined between April 1, 2025, and August 31, 2025 -- and have opted for NPS -- to migrate to UPS. They have to exercise their choice by September 30, 2025, in line with the deadline for other employees as well as retirees.

Noting that several new joinees posted at various locations have been unable to submit their form for the generation of Permanent Retirement Account Number (PRAN), the PFRDA said that they can physically submit Form A1 to their respective nodal offices or heads of training institutes and so on before September 30.

They can retain their choice to switch to NPS at a later date, but once exercised, this option is final, and subscribers cannot return to UPS. Importantly, the switch must be made at least one year before the date of superannuation or three months before voluntary retirement (VRS).

Since April 1, 2025, UPS is offered to close to 23 lakh central government employees, who are covered under NPS, which came into effect on January 1, 2004. The government announced the introduction of UPS in August 2024, following demands from employees' unions across the country to bring back the old pension scheme (OPS) that offered assured pensions.

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

Relaxation for employees deputed abroad

The PFRDA on September 24 decided to extend the physical form submission option to government employees who are currently on deputation/foreign service to organisations that are not covered under the UPS.

Noting that such employees could be facing challenges while exercising the option to switch to UPS, the PFRDA allowed them to submit physical copies of form A2 to their respective nodal offices of their parent organisation. The relaxation, however, does not extend to the deadline, which remains fixed at September 30. “The nodal office concerned shall then process the migration to UPS through the CRA system in accordance with the prescribed procedure,” the regulator said in a circular.

Government’s FAQs on UPS taxation

With the deadline for picking between UPS and NPS drawing closer, the central government reiterated the tax rules applicable to UPS contributions and exit. So, the Central government, as an employer, contributes 10 percent of the monthly emoluments (basic pay + dearness allowance) of employees to their individual corpus.

This contribution is eligible for deduction under section 80CCD(2) of the Income Tax Act, 1961, as UPS is an option under the NPS. Likewise, employees’ contribution towards UPS, up to 10 percent of their monthly emoluments (basic pay + dearness allowance), is eligible for deduction under section 80 CCD(1).

Partial withdrawals of up to 25 percent of employees’ own contributions are also tax-exempt, as is the lump-sum payable to employees at the time of their superannuation. This lump sum is calculated as 10 percent of monthly emoluments (basic pay + dearness allowance) for every completed six months of qualifying service. Employees have the option to withdraw up to 60 percent of the individual corpus or benchmark corpus, whichever is lower at the time of superannuation or retirement, without any tax implications.

Moreover, as per UPS rules, if the individual corpus exceeds the benchmark corpus for a particular employee, the excess amount is credited to the employee as lump sum. “The 60 percent of the excess of the individual corpus over the benchmark corpus is also exempt. The remaining 40 percent of the excess amount will be chargeable to tax,” says the PFRDA explainer. Pension income, however, will be taxed under the head ‘salaries’.

Tax parity for UPS, NPS

In August, the government amended the tax laws to align the tax treatment of UPS with that of the NPS, and bring in parity.

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.

Section 10 (specifically, subsections 12A and 12B) facilitates tax exemption to UPS subscribers on the payout received from individual corpus—maximum 60 percent—at the time of their superannuation, voluntary retirement or retirement. “…any payment from the NPS Trust to an assessee, who is a subscriber to UPS, 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.

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.

Official tool for UPS-NPS comparison

The key to choosing between the two is the likely benefits at retirement and pension income through the retiree’s lifetime. To make it easier for employees to make a choice, the National Pension Trust launched a calculator on its website in May 2025. Employees have to enter their date of birth, date of joining the service, qualifying years of service, retirement age, current monthly basic pay, existing NPS corpus value, estimated returns and so on to compute the lump-sum and pension payouts under both schemes.