Old Pension vs New Pension Scheme Details | What is the Difference Between Old Pension vs New Pension Scheme, Know Benefits & Other Details | NPS vs OPS Which is Better
A number of states are moving towards reverting to their previous pension systems (OPS). Recent reports have indicated that the Punjab government is giving up the ability to reintroduce OPS to its workforce. Should this plan go ahead, Punjab would become the fourth state in the Union to revert to OPS. Several Indian states including Rajasthan, Chhattisgarh and Jharkhand actually enacted the earlier pension scheme. In today’s article we will learn about the old pension and the new pension system and its aims and benefits.
About old pension vs. new pension system
Many federal states are switching back to the old pension system. The reintroduction of the old government employee pension scheme for the 2022-2023 financial year has recently been declared by Rajasthan, Chhattisgarh and Jharkhand. The previous pension plan offered a guaranteed income after retirement. In December 2003, the OPS was abolished under the BJP-led government and Atal Bihar Vajpayee as prime minister. From April 1, 2004 it was replaced by the National Pension Scheme (NPS). In a broader sense, both the NPS and the former pension scheme can be categorized as pension schemes. On the other hand, these two things are not the same. In the next essay, we will explain in detail what are the main differences between the two.
What is Old Pension Scheme (OPS)
- Employees are exempt from contributing to their pension if their employer participates in the OPS.
- The old pension was closed in 2003.
- When retiring to the old pension scheme, the employee is entitled to a payment of 50 percent of the last basic salary + care allowance or the average salary of the last ten months of service, depending on which option is most advantageous for him. The person must have at least 10 years of service under their belt.
- The former pension plan guarantees government employees a certain amount of money each month after they retire.
- The pension corresponded to fifty percent of the last salary.
- Employees are not entitled to tax benefits of any kind.
- Income from the previous pension scheme is tax-free.
- After retirement, the previous pension plan is only available to those who worked for the government and were eligible for a pension.
- Due to the improved life expectancy of people, OPS is no longer sustainable for governments.
What is New Pension Scheme (NPS)
- On April 1, 2004, the new pension plan became effective.
- Those employed by the government who participate in this NPS pay 10 percent of their basic income to the NPS, while their employers contribute up to 14 percent of the total.
- From April 1, 2019, the contribution rate that the employer levies on central government employees was increased to 14 per cent.
- Those working in the private sector are still free to participate in the NPS.
- Whether the pension fund is invested in stocks or debt, an experienced pension fund manager can ensure higher returns and greater retirement savings are achieved.
- If you’re not the kind of person who likes to take risks, the guaranteed payout option in OPS will definitely pique your interest.
- While working for the organization, workers pay part of their salary to the NPS. The amount will be invested in market linked products for investment purposes.
- Beneficiaries can deduct an investment in the NPS of up to Rs. 1,50,000 from their taxable income.
- Under the provisions of Section 80CCD (1B) of the Act, additional annual investments of up to Rs 50,000 are eligible for a tax deduction.
- Under the NPS, a retiree can take a lump sum out of their pension. 60% of the maturing corpus is tax-free, while the remaining 40% must be invested in annuities for ordinary income or annuity.
- Participation in the NPS is open to all citizens of the nation between the ages of 18 and 65.
Old pension vs. new pension system: know the difference
- One of the main differences between the OPS and the NPS is that the latter invests workers’ contributions in market instruments such as stocks over the course of their employment.
- “Consequently, the NPS creates market-linked returns with no certainty of returns, but the OPS provides such an assurance by basing the monthly stipend on the employee’s most recently received income.” 60 percent of its value is exempt from tax; the remaining forty percent must be invested in an annuity that is subject to full taxation.
- No tax is withheld on OPS earnings.
- Unless an interested citizen has much ability or capacity to take risks, they must be content with the NPS system.
New Pension Scheme vs Old Pension Scheme: Which is Better
| NPS | OPS |
| NPS is an investment-based pension program that invests some of the money in the market for higher returns. | OPS is a non Investment based pension program. |
| NPS returns aren’t certain.The subscriber’s asset allocation during employment determines returns. | The previous pension program guaranteed government retirees a monthly payout. |
| Government employees and private employees may join the NPS. | only for government employees. |
| This scheme can attract taxes as well. | No tax Under OPS |
| Employees contribute to NPS from their salaries. Market-linked instruments are used. | 50% of the last salary becomes the pension. |
| Its involves risk | Its risk free |
| Can have larger returns after retirement but no guarantee can also return smaller than expected | You will always have the same returns as it depends on the last salary taken. |
| Employees give a monthly contribution to their future from their salaries. | Employees do not have to invest anything from their salaries. |
| Plans are stable for the government and beneficial. As the money is already invested by the employee during his working periods. | This plan is unstable for the government as retired people’s life expectancies increase. It is costly for the government to run such schemes. |
Importance of NPS versus OPS
The following points show the necessity and importance of NPS over OPS.
- The Center introduced a new pension scheme for workers (excluding the military) hired after January 1, 2004. Most state governments, except for Tamil Nadu and West Bengal, followed suit.
- Growing pension obligations forced the change. It would be disastrous to reintroduce OPS, argues Ladder7 Financial Advisors founder Suresh Sadagopan.
- OPS, or pay-as-you-go plan, is an unfunded pension scheme in which current income supports pension payments, according to a March 2018 SBI research note.
- Long-term trends point to sharply increasing state pension obligations.
- The 12-year CAGR of all state government pension obligations was 34%. As of FY21, the pension outflow as a proportion of tax revenue is 13.2% for all states combined and 29.7% of its own tax revenue,” the study paper added.
- Increased life expectancy has also had an impact on pension payments.