Synopsis: The Indian government has proposed major changes to the Unified Pension Scheme (UPS) under the Taxation Law (Amendment) Bill, 2025. The move brings UPS in line with the National Pension System (NPS), offering higher tax-free withdrawals for retirees but imposing heavier taxes on early exits.
Finance Minister Nirmala Sitharaman has introduced the Taxation Law (Amendment) Bill, 2025 in the Lok Sabha, amending the Finance Act, 2025 and the Income Tax Act, 1961. These amendments aim to align the Unified Pension Scheme (UPS) with the existing National Pension System (NPS), ensuring uniform tax treatment for pension withdrawals.
Under the proposed changes, UPS subscribers will now be able to withdraw up to 60% of their pension corpus tax-free at the time of retirement, voluntary retirement, or superannuation. Additionally, they will be entitled to a tax-free lump sum equal to 10% of their monthly salary (basic pay + dearness allowance) for every six months of qualifying service—without affecting their assured monthly pension.
The bill also sets tighter restrictions on early withdrawals. Any partial withdrawal before the retirement age will be fully taxable in the year of withdrawal. Similarly, closing a UPS account or opting out before superannuation will make the entire accumulated amount, including returns, fully taxable.
At the retirement age of 60, subscribers can still withdraw 60% of the pension corpus tax-free, while the remaining 40% must be used to purchase an annuity. The annuity income will be taxed according to the individual’s income slab. However, transferring the remaining corpus for annuity purchase will remain tax-exempt.
Experts believe these changes will benefit long-term investors and retirees, while discouraging premature withdrawals that can deplete retirement savings.
Disclaimer: This article is for informational purposes only and should not be considered financial or tax advice. Readers are advised to consult a qualified tax professional before making any financial decisions.
