You must have heard the term a lot in the news recently. But are you wondering what the buzz is all about?. Stay with us to learn how this major change will impact lakhs of government employees across India.
Till 2004, the Indian government had a pension system which is now known as the Old Pension Scheme or OPS.
Under this system, government employees were entitled to pension payments as lifetime income security. The two defining features of this scheme were – One, government employees didn’t have to contribute towards pension during their working years.
Two, the benefit was defined based on the number of years served and the average salary of the last 10 months before retirement.
However, in January 2004 the central government launched a new pension scheme, which is also known as the National Pension System or NPS.
The big difference between the old and the new pension schemes is that under the NPS, employees too need to contribute towards their pension and the benefits are not defined as the new scheme is market linked.
The reason the government did away with the old pension scheme was that it was putting a lot of burden on its finances and was becoming unsustainable.
However, in recent years, NPS generated a lot of political debate due to its defined contribution and non-defined benefits. In fact, in states like Punjab and Himachal Pradesh, restoration of the Old Pension Scheme had become a key poll issue.
Meanwhile, experts argued that the new scheme was a win-win deal for all stakeholders. It generated better returns for employees thus leading to a bigger retirement corpus while easing the financial burden on the government.
Since the OPS versus NPS issue had taken such a political hue, the Narendra Government had promised a review of the matter. On August 24, 2024, it delivered on its promise by announcing a new pension mechanism called the Unified Pension Scheme or UPS, which will come into effect from the next financial year.
This scheme will be implemented from 01.04.2025 and will benefit 23 lakh Central Government employees.
So, how is the UPS different from the previous iteration of the pension scheme? Here are the key features of the scheme:
The biggest difference is that it restores defined benefits. So, government employees who serve for a minimum of 25 years will get an assured pension of at least 50% of the last 12 months’ average salary as pension.
Even those who have served for at least ten years will get a minimum pension of 10,000 rupees per month.
Also, the family pension to spouse will be given at 60 percent of the pension.
And, a lump sum amount will be provided to government employees at the time of retirement.
How will these defined benefits be funded? To do so, while the employee contribution under the UPS will remain unchanged at 10 percent of basic salary,
The government contribution will go up from current 14 percent to 18.5 percent.
Eligible government employees will have the option to chose between the two schemes. However, once they make their choice, they won't be allowed to switch back to the other scheme.
While the central government unveiled the Unified Pension Scheme, it said that states could also adopt it – and Maharashtra became the first state to do so.
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