Synopsis: The new Unified Pension Scheme (UPS) and existing National Pension System (NPS) are two retirement decisions that face a critical choice for individuals. NPS has growth and flexibility linked to the market, whereas UPS provides guaranteed income and pension stability. The paper compares the two schemes and also assists the employees in making each decision that best suits their long term financial interests.
The government employees retirement planning has once again become a major debate in India. Most government recruits have been covered under the NPS (National Pension System), which is a market linked contribution scheme where the final pension depends on investment performance. NPS is transparent and brings in long term sustainability but lacks a guaranteed monthly pension after retirement.
In 2025, the government introduced the Unified Pension Scheme (UPS) which combines the contributory structure of NPS along with assurance of a guaranteed pension. The debate got back into the spotlight when the Assam government approved and implemented UPS for government employees, which allowed them to choose between NPS and UPS. With two pension frameworks available, the government employees must carefully evaluate which scheme aligns better with their financial goals, risks and long term retirement needs.
Key Difference between NPS and UPS
Basis of ComparisonNational Pension System (NPS)Unified Pension Scheme (UPS)Nature of SchemeDefined Contribution, Market-LinkedContributory with Defined Benefit (Assured Pension)Pension GuaranteeNo guaranteed pension; depends on corpus & annuity ratesGuaranteed pension (subject to service conditions)Minimum PensionNo minimum assured amount₹10,000 per month after minimum qualifying serviceFull Pension EligibilityDepends on accumulated corpus50% of average basic pay after 25 years of serviceRisk LevelModerate to High (market exposure)Low (assured payout structure)Government Contribution14% of basic pay + DA (Central Govt employees)Structured contribution with additional support for assured payoutEmployee Contribution10% of basic pay + DA10% of basic pay + DAInflation ProtectionNo automatic Dearness ReliefIncludes Dearness Relief (inflation adjustment)Family PensionDepends on annuity option chosen60% of pension payable to familyLump Sum WithdrawalUp to 60% corpus at retirementMore focused on monthly assured pension; limited lump flexibilityMarket ExposureCan choose equity allocation (even up to 75%)Investment structure exists but pension remains assuredFlexibilityHigh investment flexibilityLower flexibility, higher security
Eligibility Criteria of NPS
Age: Between 18 to 85 years of date of application to POP or online NPS platform.
Citizenship: Must be an Indian citizen, either resident or non-resident and also an overseas citizen of India.
KYC Compliance: Adhere to the KYC requirements, provide all documents on identity.
Individual account: HUFs, PIOs are not allowed to open an individual NPS account.
Eligibility Criteria of UPS
Current government workers: Employees who are subject to NPS on 1 April 2025 are expected to select UPS and shall do so within the due date.
New recruits: Recruited after 1 April 2025 are automatically enrolled into UPS, and have a specified time to make their retirement decision.
Minimum Qualifying Service to Pension: To qualify as an employee under a minimum guaranteed pension, the employee should have at least 10 years of qualifying service. To receive a full guaranteed pension, which is usually 50% of the average basic salary, the employee must accumulate 25 years of service, which qualifies him or her.
Also read: Top 10 Income Sources That Are Completely Tax-Free in India (2026)
Benefits under NPS
Linked Wealth creation in the market: NPS gives an opportunity to invest in equities, corporate bonds and government securities that create greater retirement wealth as opposed to fixed pension schemes.
Tax Benefits: NPS is tax-deductible:
Section 80CCD(1) – Within 80C limit
Section 80CCD(1B)- Additional 50,000 deduction.
Section 80CCD(2) -Deduction on contribution by the employer.
Retirement Lump Sum withdrawal:
Is allowed to withdraw in lump sum up to 60% of the total amount.
The remaining 40% is paid every month in the form of pension.
Exchangeable lump sum withdrawal: Is allowed to draw out part of the amount as per higher education, purchase of a house or because of medical emergencies.
Portability: The PRAN does not change even if the employee shifts to a different department or sector.
Benefits Under UPS
Assured monthly pension: 50% of average basic pay after 25 years of qualifying service which provides income certainty regardless of market conditions. Even with a 10-year qualifying service, employees are entitled to a minimum assured pension.
Dearness Relief (Inflation Protection): UPS pensions are adjusted with Dearness Relief (DR), which helps retirees maintain purchasing power against inflation making it a major advantage over market-linked annuity pensions.
Family Pension Security: Approximately 60% of the pension is paid to eligible family members, In case of the pensioner’s death,
Government-Backed Stability: Retirees face lower uncertainty compared to market-based returns, as the payout is structured and supported by government contribution mechanisms.
Gratuity & Service-Based Benefits: UPS subscribers are eligible for retirement benefits such as gratuity in addition to pension benefits.
Who Should Consider Choosing NPS?
Young (early in your career) and have 20–30 years before retirement.
Comfortable with market fluctuations.
Possibility of building a larger retirement corpus.
Lump sum flexibility at retirement.
Maximise tax benefits.
NPS is better suited for employees who are willing to take some risk today for potentially higher returns tomorrow.
Who Should Consider Choosing UPS?
Closer to retirement.
Guaranteed and predictable monthly income.
Risk-averse and don’t want pensions to depend on markets.
Inflation protection (Dearness Relief).
Stronger family pension security.
UPS is ideal for employees who prioritise stability and certainty over growth potential.
Practical example: Same salary, Different retirement outcome
A government employee retires after 25 years of service. Average basic pay at retirement is ₹80,000 per month. If employee chooses NPS, over 25 years, for say the employee builds a retirement corpus of ₹1 crore. At the time of retirement: 60% can be withdrawn as lumpsum- ₹60 lakhs and 40% used as monthly pension
Approx annuity rate =6% then ₹40,00,000 * 6% = ₹2,40,000 per year
If employee chooses UPS, after 25 years of service, pension will be 50% of average basic pay.
50% of ₹80,000 = ₹40,000 per month. Additionally, pension increases defined which is inflation protection. Around 60% family pension is payable after the pensioner’s death.
Conclusion
NPS offers flexibility, tax efficiency and potential for higher wealth creation but is linked to market risk, whereas UPS provides guaranteed income, inflation protection and stronger financial security after retirement. The decision between two is based on growth or certainty. Government employees musk carefully evaluate their risk appetite, retirement goals before making a choice as it is long term and is irreversible.
Written by Boyapathi Sai Jasmitha
Trade Brains Money’s editorial team is a dedicated group of researchers, finance writers, and editors with over 10 years of experience, committed to delivering clear, accurate, and actionable insights across banking, credit cards, loans, real estate, personal finance, and taxation to help you make informed financial decisions.