Indian government employees after retirement used to get the pension under the old pension scheme, called OPS. But, from 22nd Dec 2003, New Pension Scheme called NPS came into existence and since then nothing remained same for the working employees. In every corner of India whether it is central government employees or state government employees, the comparison are done between Old Pension Scheme and New Pension Scheme.
Now before the central election of 2024, again the demand of old pension scheme (OPS) are getting traction from almost all the states, be it BJP-ruled state or Congress-ruled state or any other. So, today in this article, we will see why government employees are so much interested in old pension scheme (OPS)? What factors of old pension scheme (OPS) attracts the youth and old both alike versus New Pension Scheme (NPS)? Also, we will compare the benefits of both pension scheme like income-tax deduction, security, components etc.
Old pension scheme (OPS) and its importance:
Old pension scheme (OPS) is called a ‘Defined Benefit (DB)’ scheme, under which the employee gets a lifetime security in the form of monthly pension after retirement, based on a formula. This pension is given to pensioner till death and after that, the spouse will get the 50% monthly pension.
New pension scheme (NPS) and its importance:
The New Pension Scheme (NPS) works on ‘defined contribution’ basis in two tiers – Tier I and Tier II. Tier I is mandatory and you cannot withdraw money from it, while Tier-II is optional. In Tier-I, Employee contribution is 10% of the ‘salary plus DA’ and Government contribution is 14% w.e.f. 01.04.2019 (It was 10% from 01.01.2004 to 31.03.2019). At the retirement time, the person has to invest 40% of pension wealth to purchase an annuity (from an IRDA regulated Life Insurance Company) for getting monthly pension and rest 60%, he can commute, which is tax-free.
In Tier-II option of NPS, like tax-savings mutual fund (3-year lock-in with income tax benefits under 80C having limit of Rs. 150,000), you can invest any amount and withdraw as per your requirement.
Under NPS, a unique Permanent Retirement Account Number (PRAN) is generated and maintained by the Central Recordkeeping Agency (CRA) for individual subscriber. NPS subscriber has to choose Pension Fund Manager (PFM) as well as scheme under Active / Auto. The list of Pension Fund Manager (PFM) are:
- Birla Sunlife Pension Management Limited
- HDFC Pension Management Company Limited
- ICICI Prudential Pension Funds Management Company Limited
- Kotak Mahindra Pension Fund Limited
- LIC Pension Fund Limited
- Reliance Capital Pension Fund Limited
- SBI Pension Funds Private Limited
- UTI Retirement Solutions Limited
Then he has to select investment under Active / Auto. In Active option, the subscriber himself will decide and allocate the percentage of fund into Equity, Corporate debt, Government Bonds and Alternative Investment Funds. While in Auto option, he just has to choose among the 3 pre-defined portfolio – Aggressive, Moderate and Conservative.
Old pension scheme (OPS) vs New pension scheme (NPS):
| Parameter | Old pension scheme (OPS) | New pension scheme (NPS) |
| Existence | OPS is into existence since British rule. | NPS came into existence on 22nd Dec 2003 and became mandatory for Central Govt. job since 1st Jan, 2004. |
| Type of scheme | Old pension scheme (OPS) is called a ‘Defined Benefit (DB)’ scheme. | New pension scheme (NPS) is called a ‘Defined Contribution (DC)’ scheme. It is Contribution based Pension Scheme, regulated by Pension Fund Regulatory and Development Authority (PFRDA). |
| Formula of Pension | The pensioner gets monthly pension and spouse gets 50% of the pension amount, after expiry of pensioner. | The pensioner gets monthly pension and spouse gets 50% of the pension amount, after expiry of pensioner. |
| Components of Pension | OPS has components like DA (Dearness Allowance), DR (Dearness Relief) which usually increases with time. | NPS fully depends on the Annuity plan purchased from corpus amount (40% in case of fund withdrawal at age of 60, and 80% in case of fund withdrawal before 60). |
| Contribution to pension fund | In OPS, the employee does not contribute in the whole period of job. | In NPS, the employee has to contribute in a fund monthly for the whole period of job. Employee contribution is 10% of the salary and DA with Government contribution of 14% w.e.f. 01.04.2019 (It was 10% from 01.01.2004 to 31.03.2019). |
| Investment | Not applicable in this case. | An NPS Subscriber has to choose a Pension Fund Manager (PFM) as well as scheme under Active / Auto. |
| Risk of paying pension | The Govt. bears the risk of paying pension to the person. | The employee and the employer both bear the risk of accumulating the fund for pension. |
| Income Tax Benefits in Old and New income tax regime | Not applicable in this case. | Income tax benefits (Old income tax regime) are there: 1. 80 CCD (1) – within the overall ceiling of Rs. 1.50 lakh under section 80C. 2. 80 CCD 1(B) – Maximum of Rs. 50,000 under Old income tax regime. 3. 80CCD (2) – Employer’s contribution over and above the limit prescribed under Section 80C. Income tax benefits (New income tax regime) are there: 1. 80CCD (2) – Employer’s contribution of 14% of Salary (Basic + DA) for Govt. employees and 10% of Salary (Basic + DA) for private employees. |
| Current Beneficiaries | 1. Indian Armed Forces – Indian Army, Indian Navy, and Indian Air Force, Central Armed Police Forces, Assam Rifles, Indian Coast Guard, Special Frontier Force, Strategic Forces Command, the Andaman and Nicobar Command and the Integrated Defence Staff 2. Central Armed Police Forces – Assam Rifles (AR), Border Security Force (BSF), Indo-Tibetan Border Police (ITBP), and Sashastra Seema Bal (SSB), Central Industrial Security Force (CISF) and Central Reserve Police Force (CRPF), National Security Guard (NSG) 3. MPs and MLAs 4. Judges after a twelve-year service 5. Existing faculties of Indian Institutes of Technology (IITs), Indian Institutes of Management (IIMs), Indian Institute of Science (IISc), Central Universities, and dozens of other CEIs | 1. Central Government Employees (2.28 million in FY22), 2. State Government Employees (5.58 million in FY22), 3. Companies 4. Any Citizen Total number of subscribers (5.2 crore in FY22) and NPS AUM (assets under management) was at ₹7,36,000 crore as of March 31, 2022 |
| List of States of India | Himachal Pradesh, Chhattisgarh, Rajasthan, Jharkhand and Punjab (For employees recruited after 1st Jan 2004, States are giving both options to select between NPS and OPS with terms and conditions) | Andhra Pradesh, Arunachal Pradesh, Punjab, Orissa, Nagaland, Mizoram, Meghalaya, Manipur, Maharashtra, Madhya Pradesh, Kerala, Karnataka, Jharkhand, Jammu and Kashmir, Himachal Pradesh, Assam, Bihar, Chhattisgarh, Goa, Gujarat, Haryana, Rajasthan, Sikkim, Tamil Nadu, Uttar Pradesh, Uttarakhand (All states except West Bengal) |
Disclaimer: Kindly consult NPS official website before making any investment.