CBDT Clarifies Tax Benefits for Unified Pension Scheme under NPS

In a significant move towards aligning tax benefits for the newly introduced Unified Pension Scheme (UPS) under the National Pension System (NPS), the Central Board of Direct Taxes (CBDT) has issued a clarification that clears the air around its tax treatment.

The Office Memorandum, issued by the CBDT’s ITA-I Division, responds to a request from the Department of Financial Services (Pension Reforms Section) and affirms that the existing income tax provisions applicable to NPS will also apply to UPS, without the need for fresh legislative enactment—except in cases where payout structures diverge from standard provisions.

What is the Unified Pension Scheme (UPS)?

The Unified Pension Scheme (UPS) was officially notified on 24 January 2025, allowing eligible Central Government employees covered under NPS to opt for the new scheme. It operates within the same institutional framework as NPS and is regulated by the Pension Fund Regulatory and Development Authority (PFRDA). An amendment to the 2003 notification (dated 22.12.2003) formally incorporated UPS as an alternative pension option.

Key Tax Provisions Applicable to UPS

As per the CBDT’s concurrence, the following sections of the Income Tax Act, 1961, will apply mutatis mutandis to UPS:

Section 80CCD(1): Employee contributions
Section 80CCD(1B): Additional deduction for self-contribution (up to ₹50,000)
Section 80CCD(2): Employer’s contribution
Section 80CCD(3): Limits on contributions
Section 80CCD(4): Overarching deduction caps
Section 10(12A) and 10(12B): Tax exemptions on partial and final withdrawals from NPS

This clarification ensures that all tax benefits currently available under NPS will also be extended to UPS, making it financially attractive for those opting into the new pension system.

No Legislative Change Needed—With One Exception

The memorandum emphasizes that no fresh legislation is needed to apply these provisions to UPS—as long as contribution and payout limits are maintained. However, any deviation from the prescribed structure, such as changes in limits or withdrawal rules, will require a legislative amendment.

Official Statement

“The provisions of Section 80CCD(1), 80CCD(1B), 80CCD(2), 80CCD(3), 80CCD(4), 10(12A), and 10(12B) of the Income Tax Act, 1961, would be applicable mutatis mutandis to Unified Pension Scheme (UPS) as it is an option under National Pension System (NPS),” the OM stated.

This clarification was issued with the approval of the Member (IT) of the Central Board of Direct Taxes and signed by the Deputy Commissioner of Income Tax (OSD, ITA-I), ensuring its policy-level authority.

What This Means for Central Govt Employees

Clarity: Employees now have a clear understanding of how their contributions to UPS will be treated for tax purposes.
Continuity: There is no disruption or disadvantage in switching from NPS to UPS in terms of income tax deductions.
Confidence: The application of well-established NPS rules provides a familiar and tested tax framework for the new scheme.

The CBDT’s clarification removes uncertainty surrounding the tax implications of the Unified Pension Scheme and offers a seamless fiscal transition for Central Government employees opting into UPS. With this confirmation, UPS is poised to become a strong alternative to the traditional NPS for eligible employees, offering both structural simplicity and continued tax incentives.

View OM: