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OPS Vs NPS: Which Is Better?

Many government employees’ associations have been demanding the restoration of the old pension system, claiming the new pension system is against their interest.

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Outlook Money
December 5, 2023
OPS Vs NPS

OPS Vs NPS

The central government discontinued the Old Pension Scheme (OPS) in 2004 and replaced it with the National Pension System (NPS). OPS Vs NPS: Which Is Better, is a debate that always takes around. NPS was initially available only to government employees, but in 2009, it extended it to all, including self-employed and employees of the unorganized sectors. Despite its good intentions, NPS hasn’t been an instant success, with many national-level employee associations claiming it is against their interests, calling for restoring the old system. Several states have already returned to the old system after employees opposed it.

Here are some key differences between the old and new pension schemes when we talk about OPS Vs NPS:

Old Pension Scheme

The old pension scheme, popularly OPS, is for state and central government employees who have completed 10 or more years of service. The pension amount is calculated based on the last drawn salary and dearness allowance or the average of both, whichever benefits pensioners. Under this scheme, employees do not contribute to the pension fund. The government bears all the costs or the pension amount. The employee has no income tax benefit, but the pension amount is tax-exempt. The government revises the pension and dearness allowance (DA) half yearly, based on their salary plus DA. OPS is still available for some state government employees who joined their service before December 31, 2003. They can apply for a pension through the official government portal or visit any designated office.

National Pension Scheme (NPS)

NPS was introduced for everyone: self-employed, government employees, and organized and unorganized sector workers. NPS was an alternative to OPS and is a voluntary scheme administered by the Pension Fund Regulatory and Development Authority (PFRDA). NPS is a market-linked pension scheme that removes some of the government’s payment burden as the market gains are added to the corpus. The employee also makes the investment decisions and receives tax benefits for NPS contributions. Under NPS, deductions up to Rs 1.5 lakh in a financial year are allowed under Section 80C and up to Rs. 50,000 under 80CCD (1b) of the Income-tax Act. Those in the unorganized sectors can invest Rs 500 monthly towards NPS.

At retirement, the subscriber can withdraw up to 60 percent of the fund in a lump sum and the rest 40 percent to buy an annuity plan. The lump sum can also be withdrawn through a systematic withdrawal plan (SWP). The 40 percent of the retirement fund must be reinvested in a pension scheme with the help of 10 impaneled fund managers regulated by the PFRDA.

Which Pension Scheme Is Better?

Under OPS, employees do not contribute towards pensions, but the government pays it from its pocket, which puts a significant burden on its annual budget. On the other hand, NPS contributions up to Rs 1.5 lakh in a financial year are tax-exempt. It is open to everyone. Subscribers can withdraw a certain amount after 10 years of account opening, with a maximum of three withdrawals allowed till maturity or up to retirement age of 60. They can withdraw a lump sum at retirement and get a monthly pension by reinvesting the remaining corpus fund in instruments like debt, equity, treasury bills, bonds, etc. NPS decreases the government’s responsibility and removes its burden of paying pensions by making the citizens more independent in decision-making.

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