Discover the key distinctions between the Old Pension Scheme (OPS) and the New Pension Scheme (NPS) in India, from eligibility to tax implications, in this informative guide.
In India, the choice between the (Old Pension Scheme) OPS vs NPS (New Pension Scheme) has been a significant topic of discussion among government employees and citizens alike. Both schemes offer retirement benefits, but they differ in several critical aspects.
Understanding the Old Pension Scheme (OPS)
The Old Pension Scheme, often referred to as OPS, is a government-approved retirement scheme primarily designed for government employees. Under this scheme, eligible government employees receive a monthly pension after retirement. The pension amount is determined based on their last drawn basic salary and the number of years in service.
One of the key features of OPS is that employees do not contribute any amount from their salaries towards the pension. Instead, the government bears the entire pension cost. Additionally, OPS pensioners benefit from periodic revisions of the Dearness Allowance (DA), resulting in an increase in their pensions over time.
Introduction to the National Pension Scheme (NPS)
The National Pension Scheme (NPS) was introduced by the National Democratic Alliance (NDA) government in 2004, replacing the OPS for government employees. Over time, the scope of NPS expanded to include all citizens, including self-employed individuals and unorganized workers. NPS operates as a voluntary pension scheme administered by the Pension Fund Regulatory and Development Authority (PFRDA).
Under NPS, government employees contribute 10% of their basic salary plus Dearness Allowance (DA), while the government contributes 14% of the same. Other citizens can also participate by contributing a minimum of Rs. 500 per month. NPS is structured as a market-linked annuity scheme, with contributions invested in a diversified portfolio managed by professional fund managers.
Key Differences Between OPS and NPS
Let’s dive into the critical distinctions between the Old Pension Scheme and the National Pension Scheme:
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Eligible Employees
OPS: Limited to government employees.
NPS: Open to government employees, individual citizens aged 18-60, and NRIs.
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Basis of Pension Payment
OPS: Provides pensions based on the last drawn salary plus DA.
NPS: Offers pensions based on contributions made and investment returns during employment.
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Pension Amount
OPS: 50% of the last drawn salary plus DA or the average earnings in the last 10 months of service, whichever is higher.
NPS: Allows a lump sum withdrawal of 60% after retirement, with the remaining 40% invested in annuities for receiving a monthly pension.
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Contribution Amount
OPS: Employees do not contribute; the government bears the entire cost.
NPS: Government employees contribute 10% of their salary (basic + DA), while the government contributes 14%.
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Income Tax Benefits
OPS: No tax benefits.
NPS: Tax deductions of up to Rs. 1.5 lakh under Section 80C and up to Rs. 50,000 on other investments under Section 80CCD (1b) are available.
Tax on Pension Amount
OPS: Pension amount is tax-free.
NPS: 60% of the NPS corpus is tax-free, while the remaining 40% is taxable.
Who Can Opt for the Old Pension Scheme?
Initially, when NPS was introduced, all employees who joined service after 2014 fell under NPS and were ineligible for OPS pensions upon retirement. However, in February 2023, the Department of Pension and Pensioner’s Welfare (DoPPW) provided Central Government employees with a one-time option to choose OPS for their pensions.
To be eligible for OPS, Central Government civil employees must meet the following criteria:
- Appointed for a vacant post advertised or notified before the NPS notification date (i.e., 22.12.2003).
- Joined service on or after 01.01.2004.
- Covered under the NPS.
- Those eligible for OPS must apply for it before 31.08.2023. Failure to exercise this one-time option will result in continued coverage under NPS.
Advantages and Disadvantages of OPS and NPS
Advantages of OPS
- Assures lifelong income post-retirement.
- Provides a predetermined pension based on the last drawn salary plus DA.
- Pension increases with periodic revisions of DA.
- No employee contribution; the government bears the entire pension cost.
- Offers guaranteed, inflation-indexed pension payments to retirees and their spouses.
Disadvantages of OPS
- Imposes a substantial pension burden on the government.
- Lacks a continuous corpus for pensions, leading to increased government liability.
- Unsustainable due to rising pension liabilities.
- Increased longevity leads to extended pension payouts, straining government finances.
Advantages of NPS
- Allows a tax-free lump sum withdrawal of 60% upon retirement.
- Offers flexibility and control over investments, with the option to choose fund managers.
- Provides potentially higher returns through professional fund management.
- Eligible for tax deductions under Sections 80C and 80CCD.
- Regulated by PFRDA with transparent investment norms and regular performance reviews.
Disadvantages of NPS
- Requires employees to contribute a portion of their salary towards the pension fund.
- Pension amount depends on market-linked investment returns.
- May be challenging for individuals unfamiliar with financial terms to choose the right fund manager.
How does NPS Excel Over OPS?
While OPS provides a fixed pension amount, NPS offers greater flexibility and potential for higher returns through market-linked investments.
Here’s an example to illustrate the difference
Scenario 1: If a government employee’s last drawn salary plus DA at retirement is Rs. 10,000, they would receive a fixed pension of Rs. 5,000 per month. When DA increases by 4%, their pension would rise to Rs. 5,200 under OPS.
Scenario 2: For an employee aged 35 with a retirement age of 60 and a basic salary plus DA of Rs. 10,000, the monthly NPS contribution would be Rs. 2,400. At age 60, they could withdraw 60% of the accumulated contributions as a lump sum (Rs. 13,78,607) and invest the remaining 40% in annuities, receiving a monthly pension of Rs. 6,893 under NPS.
In the long term, NPS can benefit from rising equity markets, providing financial security to employees and reducing the government’s pension payout burden. It offers a unique combination of a lump sum and a monthly pension payout.
For a fool-proof and reliable NPS calculator, click here.
The Bottom Line
The choice between OPS and NPS depends on individual preferences and financial goals. OPS provides fixed, guaranteed pensions, while NPS offers flexibility, potential for higher returns, and tax benefits. As the landscape of pension schemes evolves, it’s essential to assess your needs and consult financial experts from Vakilsearch before making decisions about your retirement planning.
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