UPS differs from OPS in the calculation of pension, minimum pension amount, lump sum and employee contribution

The central government has announced a new pension plan for government employees called Unified Pension System (UPS). The Universal Postal Union will provide a Pension assured The scheme will benefit 90 lakh central government employees. The government has announced the UPS due to the backlash from employees regarding lower corpus and lower returns from the National Pension System (NPS) and withdrawal of the erstwhile Pension Scheme (Operations).

The SAI, announced by the government, has some significant differences from the SAI. Learn about the five key differences between SAI and SAI.

1. The calculation basis for insured pensions changes: Both UPS and OPS offer assured pensions to government employees. However, there is a difference between the two schemes as to how the pensions are calculated. Under OPS, the assured pension was fixed at 50% of the last basic salary drawn plus dearness allowance (DA). However, under UPS, the assured pension will be the average basic salary + DA drawn in the 12 months preceding retirement. This would mean that government employees, upon retirement, will receive 50% of the average salary of the last 12 months + DA. This means that if an employee is promoted to a higher pay scale during the last few months of his tenure with the government, then he will not receive 50% of the last salary drawn but a slightly lower amount as it would be 50% of the average of the last 12 months.

2. Employees must provide UPS with: Under UPS, the employee is required to contribute to the pension fund, similar to what an employee does to the National Pension System (NPS). According to a report by The Times of India, employees are required to contribute 10% of their basic salary and dearness allowance to UPS. The government will also contribute to UPS, which will be increased from 14% (currently contributed to NPS) to 18.5%. Under NPS, the government currently contributes 14%, while employees contribute 10% to NPS. Under OPS, the employee did not contribute. Thus, the old pension system was fiscally unsustainable in the long run, according to media reports.

3. Tax benefits: At present, central government employees are entitled to tax benefits on government contribution towards NPS scheme. A deduction of 14% is available under both the old and new tax regimes under the Income Tax Act, 1961. Since there was no employee contribution towards OPS scheme, no tax benefits were available. The government should clarify whether employee and government contributions are available for any tax benefits.

4. Higher minimum pension guaranteed 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 pensioners’ portal, the current minimum pension is Rs 9,000 per month after ten years of minimum service. 5. Single payment without pension reduction/Pension commutation: The unified pension system offers a lump sum payment at the time of retirement. The lump sum payment will be calculated as 1/10 of the monthly emoluments (salary + DA) on the date of retirement for every six months of service completed. This payment will not reduce the quantum of pension assured, according to the government press release. This appears to be better than the OPS because under the latter, the lump sum could be obtained at the time of retirement only through commutation of pension which reduced the pension amount. Under the old pension system, a central government servant could commute a part of the pension, not more than 40%, into a lump sum payment. No medical examination is required if the option is exercised within one year of retirement. If the option is exercised after the expiry of one year, the servant will have to undergo a medical examination by the specified competent authority.

The lump sum payable is calculated with reference to the Commutation Table. The monthly pension will be reduced by the commuted part and the commuted part will be restored on the expiry of 15 years from the date of receipt of the commuted value of the pension. However, the dearness of living relief will continue to be calculated on the basis of the original pension (i.e. without reduction of the commuted part).

The formula to arrive at the commuted value of the Pension (CVP) is: CVP = 40% (X) Commutation factor* (X) 12.

The common feature between OPS and UPS
A common feature between the OPS and the UPS is the availability of inflation-indexed pensions to compensate for rising costs of living. In the case of the OPS, the pension of retirees is reviewed twice a year (on 1 January and 1 July), whenever the government announces an increase in the dearness allowance and dearness aid.

Under the UPS scheme, inflation indexation will be applied to assured pension, assured family pension and minimum assured pension. Dearness relief based on All India Consumer Price Index for Industrial Workers (AICPI-IW), as in the case of service sector employees, will be provided under the UPS scheme, the government announced.