The Jan 2025 Gazette Notification has explained the workings of the Unified Pension Scheme. We have updated our free NPS vs UPS calculator, considering these changes. In this article, we provide a simple explanation of the formula used to compute the pension using the same terminology used in the notification.
UPS pension = (P/2) x (Q/300) x (IC/BC)
- P = 12 monthly average basic pay before superannuation
- Q = Qualifying service in months. If Q is > 300 (25 years) it will be set as 300
- If (P/2) x (Q/300) is less than Rs. 10,000 it will be taken as Rs. 10,000
- IC = individual corpus. The contribution of employees will be 10% of (basic pay + Dearness Allowance). The matching Central Government contribution will also be 10% of (basic pay + Dearness Allowance). Both will be credited to each employee’s individual corpus.
- BC = benchmark corpus. This is an imaginary corpus that will grow with the above mentioned contributions at a rate determined by a default asset allocation designated by the Pension Fund Regulatory and Development Authority which regulated the NPS. This asset allocation should be something similar to the default allocation for government employees with 15% equity and rest in bonds.
- Note in additition to the above, there will be a pool corpus with additional Central Government contribution. 8.5% of (basic pay + Dearness Allowance) of all employees who have chosen the Unified Pension Scheme option, to the pool
corpus on an aggregate basis. This corpus is to make the UPS sustainable and make guaranteed payouts possible. This will not help individual employees in any way (except when the pensions is lower than Rs. 10,000 and is set as Rs. 10,000)
Now consider the following situations.
- If the employee chooses the default allocation, contributes regularly and does not withdraw while in service, IC = BC or IC/BC =1.
- If the employee ends up with a lower corpus than the benchmark corpus for any reason – lower returns than benchmark, partial withdrawals or irregular contributions than IC/BC will be less than one and the guaranteed pension will be correspondingly lower.
- If the employees ends up with a higer corpus then the benchmark because of more returns, then for the pension calculation IC/BC =1. However the excess corpus will be paid out as lump sum at retirement.
Example 1
- P/2 = 25,000
- Q/300 =1
- IC/BC =0.8
UPS pension = (P/2) x (Q/300) x (IC/BC) = Rs. 20,000 plus applicable dearness relief
Example 2
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- P/2 = 25,000
- Q/300 =1
- IC = 1 Crore
- BC = 80 Lakhs
- IC/BC =1 for the calculation
- IC – BC = Rs. 20 Lakhs will be paid out as lump sum at retirement.
UPS pension = (P/2) x (Q/300) x (IC/BC) = Rs. 25,000 plus applicable dearness relief
UPS Lump sum formula
- BP = Basic pay as on the date of superannuation
- DA = Appicable Dearness Allowance
- L =number of six-monthly completed years of service based on the number of months for contribution to individual’s pension corpus. Or L = no of years in service x 2.
- No lump sum will be payable, if the service length is less than 10 years (less than 120 months of contribution), as Unified Pension Scheme is not applicable in such a case.
UPS Lump sum = BP*(1+DA)*L/10
Example 3
- BP = Rs. 50,000
- DA = 50%
- L = 400 months
UPS Lump sum = 50000*(1+50%)*400/10 = Rs. 30 lakhs
Also see: Revised UPS vs NPS Calculator after Jan 2025 Gazette Notification
Our UPS coverage
- Is the Unified Pension Scheme sustainable?
- Unified Pension Scheme vs National Pension Scheme: How to compare
- Should I switch from National Pension Scheme to the Unified Pension Scheme?
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