Indexation Benefit Under Unified Pension Scheme: How Will It Impact Central Govt Employees' Pension?

UPS Indexation Benefit: As the Union Cabinet, headed by Prime Minister Narendra Modi, has approved the Unified Pension Scheme (UPS) assuring a fixed pension to central government employees, the latest pension scheme has a provision of indexation benefits. Though the indexation was available under the old pension scheme (OPS), it is missing in the market-linked new pension scheme (NPS). The indexation benefit will keep increasing the pension amount of the government employees as per the inflation rate. Check the calculation:

“Inflation indexation will be given on assured pension, on assured family pension and assured minimum pension. The dearness relief will be based on the All India Consumer Price Index for Industrial Workers (AICPI-IW),” Ashwini Vaishnaw, information and broadcasting minister, said while announcing the scheme following the Cabinet meeting on August 24.

Currently, the pension and salary of central government employees are revised (dearness relief) twice a year — January and July — based on the All India Consumer Price Index for Industrial Workers. Till now, the benefit was available for the old pension scheme, which was stopped in 2003. Now, this same benefit will be applicable to the Unified Pension Scheme as well.

“The indexation benefit is a provision that will apply to assured pension, assured family pension, and assured minimum pension. This benefit ensures that these pensions are adjusted to keep up with inflation and changes in the cost of living over time. When indexed, these pensions are periodically reviewed and adjusted to maintain their real value and purchasing power for the beneficiaries,” said Rajarshi Dasgupta, executive Director (tax), AQUILAW.

Under the UPS, inflation indexation will be applied to the assured pension, the assured family pension, and the assured minimum pension.

Example Calculation (Revised Twice a Year — January and July):

Assumptions:

• Initial pension: ₹50,000 per month.
• Biannual inflation rate based on AICPI-IW: 2.5% (assuming 5% annual inflation split into two 2.5% increments).

Step 1: Calculate the First Adjustment (After Six Months)

• First inflation adjustment = ₹50,000 * 2.5% = ₹1,250.
• New pension amount = ₹50,000 + ₹1,250 = ₹51,250 per month.

Step 2: Calculate the Second Adjustment (After Next Six Months)

Second inflation adjustment = ₹51,250 * 2.5% = ₹1,281.25.

New pension amount = ₹51,250 + ₹1,281.25 = ₹52,531.25 per month.

After one year, with biannual revisions, the pension would increase from Rs 50,000 to Rs 52,531.25 per month. This approach helps maintain the purchasing power of retirees by more frequently adjusting for inflation.

Under the UPS, retirees will now receive 50% of their average basic pay over the last 12 months before retirement as a pension for a minimum qualifying service of 25 years.

In case of a pensioner’s unfortunate demise, their family will receive 60% of the pension the employee was receiving.

Rs 10,000 per month as pension, on superannuation after minimum 10 years of service.