Old Pension Scheme | National Pension System (NPS). The Return of the Old Pension Scheme: A Closer Look at the Shift from NPS.
In a surprising turn of events, several Indian states have recently made the decision to revert to the Old Pension Scheme (OPS) and bid farewell to the National Pension System (NPS).
States like Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal Pradesh have already implemented the OPS, marking a significant departure from the NPS.
In this article, we’ll delve into the details of the Old Pension Scheme, the reasons behind its resurgence, and the differences between OPS and NPS.
Understanding the Old Pension Scheme (OPS)
The Old Pension Scheme is a retirement benefit program wherein the government assumes the responsibility of providing a pension to its employees after their retirement. Notably, this pension amount is not deducted from the employee’s salary during their tenure of service. Some key features of OPS include:
- Pension Calculation: Under OPS, retired government employees receive a pension based on a predetermined formula, typically around 50% of their last drawn salary.
- Dearness Relief (DR): OPS allows retired employees to benefit from the revision of Dearness Relief twice a year, ensuring that their pension keeps pace with inflation.
- Eligibility: Only government employees are eligible to receive a pension under the Old Pension Scheme after retirement.
- General Provident Fund (GPF): OPS includes the provision of the General Provident Fund (GPF), which allows government employees to contribute a certain percentage of their salary to the fund.
OPS vs. NPS: Key Differences
The resurgence of OPS has sparked interest in understanding how it differs from the National Pension System. Here are some of the critical distinctions between the two schemes:
- Eligibility: OPS is exclusively for government employees, while NPS is open to government employees, individual citizens between the ages of 18 and 60, and even Non-Resident Indians (NRIs).
- Basis of Pension Payment: In OPS, pension payments are based on the employee’s last drawn salary plus Dearness Allowance (DA). Conversely, NPS pensions are determined by the investments made in the NPS scheme during the individual’s employment.
- Pension Amount: OPS typically offers a fixed pension amount, whereas NPS provides greater flexibility, with 60% of the accumulated contributions available as a tax-free lump sum after retirement, and the remaining 40% invested in annuities to generate a monthly pension.
- Contribution Amount: Under OPS, employees do not contribute any amount towards their pension, whereas government employees contribute 10% of their salary (basic + DA) to NPS, with an additional 14% contributed by the government.
- Tax Benefits: While OPS does not offer any tax benefits, NPS allows employees to claim tax deductions of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act and an additional Rs. 50,000 on other investments under Section 80CCD (1b).
- Tax on Pension Amount: The pension amount received under OPS is typically tax-free, whereas 60% of the NPS corpus is tax-free, with the remaining 40% subject to taxation.
Who Can Opt for the Old Pension Scheme?
The introduction of NPS in 2004 meant that employees who joined government service after 2014 were not eligible for OPS. However, in February 2023, the Department of Pension and Pensioner’s Welfare (DoPPW) provided Central Government employees with a one-time option to switch to OPS if they met specific conditions.
Eligible government employees must have been appointed for a vacant post advertised or notified before December 22, 2003, and joined service on or after January 1, 2004, under the NPS. The deadline for opting for OPS is August 31, 2023.
Advantages and Disadvantages of OPS and NPS
Advantages of OPS:
- Assured, fixed pension income.
- Pension increases with the revision of DA.
- No deductions from employees’ salaries for pension payments.
- The government bears the pension expenditure.
- Guaranteed, inflation and pay commission-indexed pension payments.
Disadvantages of OPS:
- A significant financial burden on the government.
- Lack of a pension corpus for sustainable growth.
- Unsustainable due to increasing pension liabilities.
- Extended pension payouts due to increased life expectancy.
Advantages of NPS:
- Ability to withdraw 60% of the corpus tax-free upon retirement.
- Flexibility and control over investments.
- Potential for higher returns through market-linked instruments.
- Tax deductions available for NPS contributions.
- Transparent regulation by the PFRDA.
Disadvantages of NPS:
- Mandatory employee contributions.
- Variable pension amounts based on investment returns.
- Lack of financial literacy may affect fund manager selection.
Why NPS May Be a Better Choice
While OPS offers fixed pensions, NPS provides flexibility and the potential for higher returns. For those willing to invest for retirement and enjoy tax benefits, NPS is a viable option. It allows investments of up to Rs. 1.5 lakh per annum under Section 80C, with an additional Rs. 50,000 deductible under Section 80CCD.
Moreover, NPS offers control over investments, transparency in regulation, and the ability to withdraw a significant lump sum upon retirement. This model also reduces the government’s burden by shifting the risk of inflation and increasing life expectancy onto the individual.
In conclusion, the return of the Old Pension Scheme in several Indian states is a noteworthy development in the realm of retirement benefits. While OPS offers the comfort of fixed pensions, the National Pension System, with its flexibility and potential for higher returns, seems to align better with the changing financial landscape and individual aspirations for a secure retirement.
NPS Trust welcomes you to ‘eNPS’ ,which will facilitate:-
➤ “Registration” to open an individual pension account under NPS. By using this option, an Indian Citizen between 18-70 years can open ‘Tier I’ or ‘Tier I and Tier II both’ types of account, an NRI/OCI individual can open only ‘Tier I’ account. You need to OTP Authenticate \ eSign your Subscriber Registration form using this option.
➤ “Contribution” to make Subsequent Contribution to your Tier I or Tier II account under NPS. Swavalamban account holders can also make Subsequent Contribution through this option. CRA charges are applicable on such transactions and will be recovered separately by way of units deduction from Subscriber NPS account.The investment will take place on T+2 working days basis (subject to receipt of clear funds from PGSP)
➤ “Tier II Activation” for activation of Tier II account under NPS. All existing Subscribers who have an active Tier I account can activate Tier II account using this option. Note: No charges is levied for the activation of Tier II account.
➤ “Get Same Day NAV (D-Remit)” for Registration of Virtual Account number for making seamless Investment directly through your Bank Account. Same day NPS Investment (T+0) facility can be availed through Direct Remittance (D-Remit) process (as per pre-defined cut-off time for receipt of funds at Trustee Bank).
➤ “Annual Transaction Statement on Email” for receiving your Annual Transaction Statement for NPS transactions on your registered email ID. This is part of Go-Green initiative of Protean eGov-CRA.
➤ “Instant Contribution through UPI ID” PFRDA.15digitVirtualAccount @ axisbank (15 Digit Virtual Account starts with 600101 (Tier I) and 600102 (Tier II)).
Frequently Asked Questions (FAQs)
Which states have an Old Pension Scheme?
Rajasthan, Punjab, Jharkhand, Chhattisgarh, and Himachal Pradesh have implemented the Old Pension Scheme for government employees, discontinuing the National Pension System (NPS).
Which is better, NPS or OPS?
The choice between NPS and OPS depends on individual preferences and financial goals. NPS offers more flexibility, tax benefits, and potential for higher returns, making it suitable for those looking to invest for retirement. OPS provides fixed pensions but places the financial burden on the government.
What is the full form of OPS and NPS?
OPS stands for the Old Pension Scheme, while NPS stands for the National Pension Scheme or New Pension Scheme.
What is the New Pension Scheme?
The New Pension Scheme (NPS), also known as the National Pension System, is a retirement and investment scheme introduced by the Central Government for government employees in 2004. It offers tax benefits, investment options, and flexibility in managing retirement funds.