Understanding Tax Benefits Under UPS: NPS Rules Now Apply
As per the latest clarification, tax benefits available under the National Pension System (NPS) shall now apply mutatis mutandis (with necessary modifications) to the Unified Pension Scheme (UPS). This has major implications for salaried individuals, self-employed professionals, and employers who opt for UPS over traditional retirement plans.
Let’s decode what this means for your tax planning in FY 2025–26.
What is the Unified Pension Scheme (UPS)?
The Unified Pension Scheme is a new-age retirement benefit system introduced to consolidate and simplify multiple fragmented pension schemes under one umbrella. While still gaining traction, UPS aims to improve portability, regulatory oversight, and pension literacy among working Indians.
Government clarification:
As per CBDT circulars and Budget documents for FY 2025–26, tax treatment of contributions, withdrawals, and maturity under NPS will now equally apply to UPS.
Tax Benefits of NPS (Now Also for UPS)
Here’s a quick look at NPS tax benefits that now extend to UPS:
| Section | Applicability | Tax Benefit | Who Can Claim |
|---|---|---|---|
| 80CCD(1) | Employee/self-employed contribution | Deduction up to ₹1.5 lakh (within 80C limit) | Individual |
| 80CCD(1B) | Additional contribution | Extra deduction of ₹50,000 | Individual |
| 80CCD(2) | Employer contribution | Deduction up to 10% of salary (14% for central govt employees) | Salaried employees only |
| Maturity | On exit/withdrawal | 60% lump sum is tax-free; 40% annuity is taxable | Individual |
➡️ These will now be applicable mutatis mutandis to contributions and withdrawals under UPS.
What Does Mutatis Mutandis Mean in Tax Context?
In simple terms, mutatis mutandis means “with necessary changes having been made.” So, the same tax benefits, structures, and limits of NPS will now apply to UPS, with tweaks based on UPS-specific rules.
For example:
- If UPS allows higher employer contribution caps, tax deduction limits will still follow Section 80CCD rules unless notified otherwise.
- Exit/maturity taxation under UPS will mirror NPS structure, unless UPS has a different annuity format.
Expert View: Check Form 16 for Employer Contributions
“If your employer is contributing to UPS, check Form 16 Part B to ensure Section 80CCD(2) deduction is reflected properly. Otherwise, claim it manually while filing ITR,” advises a Chennai-based tax expert.
How to Claim UPS Tax Benefits While Filing ITR
- Employee contribution
- Claim under Section 80CCD(1) (part of 80C limit)
- Additional contribution under 80CCD(1B) (₹50,000 extra)
- Employer contribution
- Claim separately under 80CCD(2) (not part of 80C cap)
- Proofs needed:
- Salary slips, employer declaration
- UPS account statement showing contributions
- Annuity purchase details at exit
UPS vs NPS – Quick Tax Comparison
| Feature | NPS | UPS |
|---|---|---|
| Regulator | PFRDA | Likely unified under PFRDA or notified authority |
| Tax benefits | Sections 80CCD(1), (1B), (2) | Same benefits apply |
| Withdrawal tax | 60% tax-free, 40% annuity taxable | Same, unless notified differently |
| Portability | National | Unified under one pension system |
Government Source
This equivalence was clarified via Budget speech 2025 and supported in CBDT’s explanatory notes, aiming to encourage broader adoption of structured retirement saving systems.
For official reference, visit: https://incometaxindia.gov.in
FAQs
Q1. Can I claim 80CCD(1B) even if I have a UPS account, not NPS?
Yes. The benefit of ₹50,000 additional deduction applies to UPS now.
Q2. Will UPS maturity be fully exempt from tax?
No. Just like NPS, only 60% of the corpus is exempt. The rest must be used for annuity, which is taxable.
Q3. What if my employer contributes to both NPS and UPS?
Deduction under 80CCD(2) is limited. Combined contributions across both schemes will be considered for tax benefit capping.
Final Thoughts
With this tax parity between NPS and UPS, individuals and employers now have more flexibility in choosing retirement products without losing tax benefits. For salaried professionals, this is a win — especially if your employer offers UPS as a default retirement scheme.
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Summary
NPS tax benefits under Sections 80CCD(1), 80CCD(1B), and 80CCD(2) now apply to the Unified Pension Scheme (UPS). Learn deduction rules, withdrawal tax, and ITR claim tips.