UPS differs from OPS in pension calculation, minimum pension amount, lump sum payment and employee contribution
The UPS announced by the government differs from the OPS in some key ways. Know the five key differences between UPS and OPS.
1. Calculation basis for the guaranteed pension changes: Both UPS and OPS provide guaranteed pensions to government employees. However, there is a difference in the calculation of pensions between the two schemes. Under OPS, the guaranteed pension has been set at 50% of the last basic salary + Cost of Living Allowance (DA). On the other hand, under UPS, the guaranteed pension is equal to the average basic salary + DA earned during the last 12 months preceding retirement. This would mean that government employees would receive 50% of the average salary of the last 12 months + DA upon retirement. This means that an employee who is promoted to a higher pay grade during the last few months of his service with the government will not receive 50% of the last salary earned but a slightly lesser amount, i.e. 50% of the average salary of the last 12 months.
2. Employees must make the following contributions to UPS: Under the UPS, an employee has to contribute to the pension fund. This is similar to the contributions of an employee to the National Pension System (NPS). According to a report in the Times of India, employees have to pay 10% of their basic salary and cost of living allowance to the UPS. The government will also make contributions to the UPS, which will increase from 14% (currently contributions to the NPS) to 18.5%. Under the NPS, the government currently contributes 14% while employees contribute 10% to the NPS. Under the OPS, employees did not pay any contributions. Due to this, the old pension system was not financially sustainable in the long run, according to media reports.
3. Tax advantages: A central government employee is currently eligible for tax benefits on government contribution to NPS scheme. Under the Income Tax Act, 1961, a deduction of 14% is available under both the old and new tax regimes. Since there was no employee contribution to OPS, no tax benefits were available. The government needs to clarify whether employee and government contributions are eligible for tax benefits.
4. Higher guaranteed minimum pension at UPS: UPS offers a guaranteed minimum pension of Rs 10,000 per month at the time of retirement after a minimum of ten years of service. According to the government’s pensioner portal, the minimum pension is currently Rs 9,000 per month after ten years of service. 5. Lump sum payment without pension reduction/pension settlement: The Unified Pension Scheme offers a lump sum payment on retirement. The lump sum payment is calculated as 1/10th of the monthly emoluments (salary + DA) on the date of retirement for every six months of service. This payment does not reduce the amount of guaranteed pension, says the government press release. This seems better than the OPPS as under the latter, a lump sum payment on retirement could only be made by converting the pension, which reduced the amount of pension. Under the old pension scheme, a central government officer could convert a part of the pension, but not more than 40%, into a lump sum payment. If the option is exercised within one year of retirement, no medical examination is required. If the option is exercised after the completion of one year, he/she will have to undergo a medical examination by the competent authority.
The lump sum to be paid is calculated using the severance pay table. The monthly pension is reduced by the severance pay part and the severance pay part is restored after 15 years from the date of receipt of the severance pay pension value. However, the cost-of-living allowance is still calculated on the basis of the original pension (ie without reducing the severance pay part).
The formula for calculating the severance payment value of the pension (CVP) is: CVP = 40% (X) severance payment factor * (X) 12.
The commonality of OPS and UPS
A common feature between OPS and UPS is the availability of an inflation-indexed pension to offset the rising cost of living. Under OPS, pensioners’ pensions are adjusted twice a year – on January 1 and July 1 – when the government announces an increase in the cost-of-living allowance and cost-of-living subsidy.
Under UPS, inflation indexation will be applied to Guaranteed Pension, Guaranteed Family Pension and Guaranteed Minimum Pension. As per the government announcement, UPS will provide inflation reduction based on All India Consumer Price Index for Industrial Workers (AICPI-IW) as in the case of service employees.
