Telomerase biogenesis is a complex process where several steps remain poorly understood. Single-strand-selective uracil-DNA glycosylase (SMUG1) associates with the DKC1-containing H/ACA ribonucleoprotein complex, which is essential for telomerase biogenesis. Herein, we show that SMUG1 interacts with the telomeric RNA component (hTERC) and is required for co-transcriptional processing of the nascent transcript into mature hTERC. We demonstrate that SMUG1 regulates the presence of base modifications in hTERC, in a region between the CR4/CR5 domain and the H box. Increased levels of hTERC base modifications are accompanied by reduced DKC1 binding. Loss of SMUG1 leads to an imbalance between mature hTERC and its processing intermediates, leading to the accumulation of 3'-polyadenylated and 3'-extended intermediates that are degraded in an EXOSC10-independent RNA degradation pathway. Consequently, SMUG1-deprived cells exhibit telomerase deficiency, leading to impaired bone marrow proliferation in Smug1-knockout mice.