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Government workers granted significant tax reductions following modifications in tax legislation by the central government

Government expands tax advantages similar to NPS to subscribers of Unified Pension Scheme (UPS). Now, up to 60% of the retirement savings and select lump sum payouts under UPS are exempt from taxes, offering substantial monetary relief to public sector employees.

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Government workers receive significant tax reduction following alterations to tax regulations by...
Government workers receive significant tax reduction following alterations to tax regulations by the central government.

Government workers granted significant tax reductions following modifications in tax legislation by the central government

The Unified Pension Scheme (UPS), launched on April 1, 2025, has received a significant boost with the extension of National Pension System (NPS) like tax benefits. This move aims to provide substantial tax relief and incentives to UPS subscribers, ensuring parity with the existing NPS structure.

The key changes in taxation for UPS subscribers are as follows:

  1. Tax Exemption on Withdrawals: Up to 60% of the individual's accumulated corpus at superannuation or retirement under UPS can now be withdrawn tax-free, aligning with the NPS rules.
  2. Lump Sum and Premature Withdrawals: Lump sum payments and premature withdrawals from UPS are exempt from income tax, similar to NPS provisions. Earlier, premature withdrawals were taxable, but the amendment grants full exemption, bringing parity between UPS and NPS.
  3. Annuity Purchase and Subsequent Income: The tax exemption extended to annuity purchases or at superannuation (usually age 60) applies to UPS subscribers as well. However, income received as pension from annuity is taxable under Section 80CCD(3), consistent with NPS treatment.
  4. Employee and Employer Contribution Deductions: UPS subscriber contributions qualify for deduction under Section 80CCD(1) within ₹1.5 lakh under Section 80C plus an additional ₹50,000 under Section 80CCD(1B). Employer contributions are deductible under Section 80CCD(2) up to specified limits, in alignment with NPS.
  5. Tax Treatment during Transfers: Transfers to an annuity or pool corpus within UPS are not taxable at the time of transfer, again matching NPS provisions.
  6. Partial Withdrawals during Service: Partial withdrawals up to 25% during the employment tenure remain exempt if conditions are met; however, full withdrawal before retirement is taxable.
  7. Unified Framework and Clarity: The amendments introduce explicit legal provisions to remove ambiguities, ensure uniform tax treatment between UPS and NPS, and simplify rules on family pension, partial withdrawals, and retirement benefit accounts.

These reforms effectively put UPS on an equal footing with the NPS regarding tax benefits, thereby removing previous disparities and making subscribers' tax treatment consistent and more favorable.

The Finance Ministry announced last month that tax benefits as available under NPS will apply to UPS. The bill specifies that this tax-free amount does not exceed 60% of the individual corpus. The bill was passed in the Lok Sabha without debate.

UPS offers government employees a fixed monthly pension with flexibility of investment and withdrawal, similar to the National Pension System (NPS). The scheme was implemented to help employees stay in the pension scheme for a long time and increase financial security.

The Finance Minister, Nirmala Sitharaman, introduced this change in the Taxation Laws (Amendment) Bill, 2025. The sum received as a lump sum amount under UPS, as per the notification number FX-1/3/2024-PR, dated the 24th January, 2025, will also be tax exempt. This tax benefit is applicable to payments from the National Pension System Trust to an assessee who is a subscriber to the Unified Pension Scheme.

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