Good News for Central Government Employees: UPS Now Offers NPS-Like Tax Benefits — Here's What You Need to Know

Central government employees now have more flexibility in planning their retirement — and good news on the tax front too. The Finance Ministry has officially extended the same income tax benefits that come with the National Pension System (NPS) to the Unified Pension Scheme (UPS) as well.

This new policy change means employees who choose to switch to the UPS will enjoy similar tax deductions and exemptions as those available under the NPS, making retirement planning more attractive, flexible, and tax-efficient.

What Has Changed?

The Finance Ministry announced this update through a press release on July 4, 2025, confirming that the tax advantages of NPS will apply to UPS “mutatis mutandis.”

In simple terms, this Latin phrase means “with necessary changes having been made.” So, while the structure and framework of UPS may differ from NPS in certain aspects, the income tax rules will be aligned to ensure similar benefits for employees opting for UPS.

Why Did the Government Make This Move?

The decision is part of the government’s broader effort to enhance financial security for central government workers. By offering tax parity between NPS and UPS, employees are now empowered to choose the scheme that best suits their retirement goals without worrying about losing out on tax savings.

According to the Finance Ministry, the objective is to create a more robust and secure retirement system, offering clear, flexible, and tax-efficient options for all central government employees.

Who Can Opt for UPS?

The Unified Pension Scheme (UPS) is a newly introduced retirement plan available for all new recruits joining the Central Government Civil Services from April 1, 2025 onwards.

However, it’s not limited to new employees alone. Existing employees under the NPS also have the option to switch over to the UPS — but only within a specified window.

Deadline Extended: Here’s the New Date to Switch

Initially, the last date for current employees to shift from NPS to UPS was June 30, 2025. Recognizing the need for more time, the government has extended this deadline to September 30, 2025.

This is a one-time window — so employees who wish to switch must decide before this date. After the deadline, switching options may not be available.

How Do NPS Tax Benefits Work — And How They’ll Apply to UPS

Under the NPS, employees can claim tax deductions under Section 80CCD(1) for contributions made by themselves, subject to 10% of their salary (basic + DA), within the overall ceiling of Section 80C (₹1.5 lakh).

Additionally, they can claim an extra deduction of ₹50,000 under Section 80CCD(1B) — over and above the Section 80C limit.

Employers’ contributions up to 14% of salary for central government employees are also tax-exempt under Section 80CCD(2).

These same benefits, with necessary adjustments, will now apply for those who choose the UPS, ensuring that the switch does not lead to any loss of tax advantage.

What Should Employees Do Now?

✅ Compare both options: Understand the key differences between NPS and UPS — including structure, management, and payout flexibility.

✅ Plan ahead: Consider how the tax savings under UPS will impact your take-home income and retirement corpus.

✅ Consult experts: It’s wise to discuss your options with a financial advisor or your department’s HR to make an informed decision.

✅ Act before the deadline: If you want to shift to UPS, make sure you complete the necessary paperwork before September 30, 2025.

The Bottom Line

By aligning the tax benefits of UPS with NPS, the government has levelled the playing field for central government employees. This means your choice between the two schemes can now be based on what works best for your long-term retirement goals — not just tax savings.

If you’re a central government employee, take this chance to review your retirement plan carefully. It’s not just about saving more today — it’s about ensuring financial security and peace of mind for tomorrow.