Scores of central and state government employees will hold a “Pension Rights Maharally” at Delhi’s Ramlila Maidan today, August 10, 2023, to demand the restoration of the Old Pension Scheme. Organisers say that many employees who began services after January 1, 2004, oppose NPS due to concerns about post-retirement security.

NPS is mandatory for those who joined government services on January 1, 2004, barring armed forces. On May 1, 2009, NPS was extended to all citizens who want to contribute voluntarily.

Under NPS, employees can withdraw up to 60 per cent of the fund upon retirement, and they must invest the rest in annuity plans. Both government and the employee contribute to the fund.

On the other hand, the Old Pension Scheme (OPS) guarantees a monthly pension to the beneficiary until death. The monthly pension is half of their last drawn salary.

Some employees fear that the value of their remaining corpus fund may reduce if the market goes down, as the pension manager invests 40 per cent of the fund in market-linked plans.

How NPS Works

Under the NPS system, the employee contributes 10 per cent of the salary while the government contributes 14 per cent to the pension fund. The fund is then invested in a diversified portfolio of government Treasury bills, bonds, shares, debentures, etc.

The NPS subscribers can withdraw up to 60 per cent of the money upon retirement at 60 tax-free. The rest must be used to buy annuity plans. If exited from NPS before 60, the individual can withdraw up to 20 per cent of the corpus fund and the rest for purchasing annuities.

NPS Account Types

NPS accounts are of two categories: Tier 1 and Tier 2. While Tier 1 is obligatory and the primary retirement corpus builder, Tier 2 is an optional investment account, allowing more deposits and withdrawal flexibility. Only Tier 1 subscribers can open a Tier 2 account.

Unlike the lock-in period in Tier 1, where a subscriber must reach 60 to become eligible for a withdrawal, Tier 2 has no such restrictions; it allows withdrawals as needed.

NPS has significant tax benefits. Under Section 80C of the Income Tax Act, contributors can claim up to Rs 1.5 lakh deductions for NPS contributions. Moreover, Section 80CCD (1B) offers an exclusive deduction of up to Rs 50,000. These tax benefits lower the taxable income. However, Tier 2 accounts do not enjoy the same tax advantages.