New Income Tax Bill 2025: Tax Exemption, And Other Deduction For Unified Pension Scheme Explained

Here are the key changes provided for in the Taxation Law including Tax Exemption for Unified Pension Scheme and Deduction for UPS.

New Delhi: The Lok Sabha passed the Taxation Laws (Amendment) Bill, 2025 On 11 August 2025. It was introduced by Finance Minister Nirmala Sitharaman. The bill aims to provide tax exemptions for the subscribers of the Unified Pension Scheme and ensure that the benefits of the UPS are on par with those of the New Pension Scheme by granting tax exemptions to its beneficiaries.

The Taxation Laws (Amendment) Bill, 2025 seeks to restructure the Income Tax Act, 1961 and the Finance Act, 2025.

Here are the key changes provided for in the Taxation Law:

Tax Exemption for UPS
The Bill states that any distribution by the NPS Trust to a subscriber of the UPS scheme is exempt from taxation. This concession is provided on the condition that it does not exceed 60 percent of the amount contributed to the corpus of the individual during their superannuation or retirement.

Deduction for UPS
The Bill states that for a subscriber to the UPS, any payments made to an assessee or a nominee on superannuation or retirement shall be considered to be the income of the assessee or the nominee and shall be taxed accordingly in the year the payment is made.

Foreign Investment
It provides direct tax relief to the Public Investment Fund of Saudi Arabia and its subsidiaries investing in India under Section 10 (23FE) of the IT Act. The Bill states that the Government of India has reached an understanding with the Government of Saudi Arabia to provide for certain direct tax benefits through the Income-tax Act.

Changes to Block Assessment
The Bill refines provisions related to block assessments in income tax search cases to streamline the treatment of pending assessments and reassessments during search operations. As per the Bill, it is required to provide for some changes in the scheme of Block assessment of search cases for its correct application.

The government announced in July that all tax benefits available under the NPS shall apply to the UPS which was implemented from April 1, 2025. These provisions ensure parity with the existing NPS structure and provide significant tax breaks and incentives to employees who choose UPS. The inclusion of UPS under the tax framework is the effort of the government to strengthen retirement security for central government employees.