FinMin Order: Tax Treatment under Unified Pension Scheme with Existing Income Tax Rules for Central Government Employees
New Delhi: Good News for Central Government employees who have opted for the Unified Pension Scheme (UPS). Central Board of Direct Taxes (CBDT) has officially confirmed that all major tax benefits applicable under the National Pension System (NPS) will also apply to Unified Pension Scheme subscribers.
The announcement was made through an office memorandum dated 2nd July 2025, which the Department of Financial Services under Ministry of Finance further communicated on 4th July 2025, and circulated to all postal circles and accounts offices by the Department of Posts on 9th July 2025.
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According to the CBDT clarification, the following Income Tax Act provisions will apply to UPS:
- Section 80CCD(1) – Tax deduction on employee’s contribution
- Section 80CCD(1B) – Additional deduction of ₹50,000 on NPS contributions
- Section 80CCD(2) – Deduction on employer’s contribution
- Section 80CCD(3) & 80CCD(4) – Related compliance norms
- Section 10(12A) & 10(12B) – Tax exemptions on partial and final withdrawals
According to the office memorandum, “The provisions of Section 80CCD (1), 80CCD (1B), 80CCD (2). 80CCD (3), 80CCD (4). 10(12A) and 10(128) of the Income Tax Acl, 1961, would he applicable mutatis-mutandis on Unified Pension Scheme (UPS) as it is an option under National Pension System (NPS)“
This means that those who switch to or are enrolled under the Unified Pension Scheme, introduced as an option under NPS from 1st April 2025, will continue to enjoy all the same income tax benefits as before.
Any diversion regarding payout/contributions shall require legislative amendment.
The Department of Posts has instructed that this tax treatment update be shared with all employees, including existing staff, pensioners, and family pensioners, to ensure transparency and clarity regarding tax treatment under UPS.
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The Unified Pension Scheme was notified on 24th January 2025 and Central Government employees currently can choose under NPS are to opt for UPS.
