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The Indian government's newly introduced Unified Pension Scheme (UPS) has the potential to significantly impact the National Pension System (NPS) if a large portion of central government employees opt for the UPS, as is anticipated. The UPS proposes two funds: an individual fund, comprising employee contributions and matching government contributions, and a separate government contribution fund. The individual fund is expected to be managed by the NPS, potentially mitigating the impact on the existing NPS system. However, the fate of the NPS corpus, currently holding Rs 12.8 lakh crore, remains uncertain as central government employees transition to the UPS.
The UPS implementation is scheduled to begin on April 1, 2025. If state governments also introduce similar schemes and offer NPS subscribers the option to switch, the impact could be even more significant. The NPS currently has 6.7 million subscribers from state governments, contributing 49.4% of the total corpus. Collectively, state and central government employees account for over three-quarters of the NPS corpus.
The corporate sector subscribers to NPS, totaling 2.1 million with a corpus of Rs 1.89 lakh crore, represent 14.8% of the total scheme. The NPS offers tax benefits on contributions, and upon maturity, 60% of the corpus can be withdrawn tax-free, while the remaining balance must be used to purchase an annuity. The future of the NPS, given the impending transition to the UPS, remains to be seen, particularly its implications for the existing corpus and its impact on subscribers from both the government and corporate sectors.
The UPS and its potential impact on the NPS are significant developments in the Indian pension landscape. While the details of the implementation are yet to be finalized, the transition could significantly alter the dynamics of pension schemes in India. The impact on existing NPS subscribers, the management of the NPS corpus, and the long-term sustainability of both the NPS and UPS will be crucial factors to observe in the coming years.
Source: Will Unified Pension Scheme substantially impact NPS?