From April 1, 2025, the Central Government will roll out the Unified Pension Scheme (UPS), bringing in a new structure for pension and gratuity benefits for employees under the National Pension System (NPS). One of the key components of this scheme is the UPS Gratuity Rules, which outline how gratuity will be calculated, paid, and taxed.
These changes are expected to impact thousands of government employees, especially those nearing retirement or planning their long-term financial goals.
Who Is Eligible for Gratuity Under UPS?
To qualify for gratuity under the new UPS structure, employees must complete at least five years of continuous service. This rule is in line with the existing eligibility criteria under the Old Pension Scheme (OPS), ensuring continuity for long-term government staff.
In case of the death of an employee during service, the five-year condition does not apply. The family is entitled to death gratuity, calculated based on the length of the employee’s service.
How Is Gratuity Calculated Under UPS?
As per the UPS Gratuity Rules, the retirement gratuity is calculated as 16.5 times the last drawn salary (which includes basic pay plus dearness allowance), or ₹25 lakh, whichever is lower. This formula mirrors the OPS method and helps ensure fairness across both pension systems.
For example, if an employee’s last drawn salary is ₹50,000, the gratuity amount could go up to ₹8.25 lakh if the full 16.5 times calculation applies. However, the maximum cap of ₹25 lakh ensures uniformity across pay grades.
Types of Gratuity Provided
There are two main types of gratuity under the UPS Gratuity Rules. First is the retirement gratuity, which is granted after completing the mandatory service period. The second is death gratuity, which is paid to the family if the employee passes away while still in service.
The amount paid in death gratuity depends on the length of service completed before the unfortunate event. It provides financial relief to the family during difficult times.
Difference Between UPS and OPS
While the gratuity formula remains the same, UPS is structured differently compared to OPS. OPS is a defined benefit scheme, where the government takes full responsibility for pension payments. In contrast, UPS is a hybrid model combining features of both OPS and NPS, with contributions made by both the employee and the employer.
Another key difference lies in pension calculations. Under OPS, the pension is calculated based on the last drawn basic pay. But under UPS, it is based on the average basic salary over the last 12 months, provided the employee has completed at least 25 years of service.
Gratuity Rules Outside UPS
Outside of the UPS structure, the general gratuity rules in India still require a minimum of five years of continuous service. However, there are ongoing discussions about reducing this eligibility to three years and increasing the tax-exempt limit for gratuity. If these proposals are implemented, they could benefit private-sector employees as well.
Taxation on Gratuity
Gratuity received upon retirement or due to the death of an employee is usually tax-exempt up to the legal limit. However, any gratuity received while still employed is fully taxable. The ₹25 lakh ceiling under the UPS Gratuity Rules also serves as the maximum tax-exempt limit for Central Government employees.
Tax planning around gratuity will remain an important aspect for retirees. With the UPS offering a lump sum gratuity payout, it will play a key role in post-retirement financial stability.
Final Word
The introduction of the UPS Gratuity Rules is a significant move toward unifying pension benefits for government employees under NPS. By maintaining parity with OPS in gratuity calculations, the government ensures that long-serving employees are not at a disadvantage.
While the pension structures between OPS and UPS may differ, the gratuity benefit remains a stable and reliable financial cushion at the time of retirement or in unfortunate events. As April 2025 approaches, employees are advised to understand the new rules and plan their retirement accordingly.