NPS vs OPS: Difference Between  Pension Scheme and Old Pension Scheme

What is the Old Pension Scheme (OPS)?

The Old Pension Scheme is a fixed pension plan for government employees in India. Employees who have worked for at least 10 years get a monthly pension based on their last salary. In this scheme, the government pays the whole pension amount without deducting it from the employee’s salary during service. 

This scheme is only available for government employees. Once retired, government employees receive their pension regularly. Additionally, every government employee gets a dearness allowance, calculated as a proportion of basic salary. Twice a year, they get an increase in their pensions due to changes in Dearness Allowance (DA). This means their pension goes up when the DA increases. 

Introduction of the National Pension Scheme (NPS)

In 2004, the National Democratic Alliance (NDA) replaced the Old Pension Scheme with the National Pension Scheme, called NPS. Earlier, this scheme was only available for government employees. From 1st May 2009, the Pension Fund Regulatory and Development Authority (PFRDA) made it voluntarily available to all government and private sector employees, including self-employed citizens. It is also called the New Pension Scheme.

It is an optional program managed by the Pension Fund Regulatory and Development Authority (PFRDA). Government employees contribute 10% of their basic salary and Dearness Allowance (DA), while the government adds 14%. Other citizens can contribute a minimum of ₹500 monthly.

NPS is a market-linked annuity scheme. The fund contribution is invested in government securities, corporate sector bonds, shares, etc. These funds are managed by the fund managers registered under PFRDA. Upon retirement, the employee can withdraw about 60%, and the remaining 40% of the total invested amount is used to purchase annuities, which can be used to set up an amount as a regular pension post-retirement.

 
Difference between the Old Pension Scheme and the National Pension Scheme

Employees who can opt for the Old Pension Scheme

When the government started the NPS, people working after 2014 had to choose to be in the NPS. They couldn’t get the old pension after they retired.

But in February 2023, the Department of Pension and Pensioner’s Welfare gave Central Government workers a one-time chance to choose to get the old pension scheme.

However, the eligible employees had to file the choice before 31.08.2023. Those who did not choose this one-time option continue to be covered under NPS. 

The employees who are eligible for this one-time option are:

1. Joined the service on or after 01.01.2004, the day NPS came into effect, even though such posts they have joined were advertised before 22.12.2003 when NPS was notified. 
2. Covered under NPS or are eligible to switch from OPS to NPS. 
3. Members of AIS selected via the Civil Services examination of 2003 and 2004 and the India Forest Service examination of 2003 are also eligible to be covered under these provisions. 

Old Pension Scheme Advantages and Disadvantages

Advantages of OPS:

• There is no salary deduction for pension; the employee’s salary will remain untouched.
• The government covers all the expenses as it is a government-funded scheme.
• It is a structured pension plan in which the employee will get 50% of their last salary as a pension. 
• Pension under OPS does not attract any taxes. 

Disadvantages of OPS:

• There is no committed pension fund like NPS as in NPS the deduction for the pension is made from the employee’s salary or employer contribution for the same is there. But in case of OPS no such practice is there, and hence it has become difficult for the government to fund retired employees. 
• It put significant financial strain. Also, in cases where the employee has a longer life, it extends the government’s responsibility for long-term pension disbursement. 

National Pension Scheme Advantages and Disadvantages

Advantages of NPS

• NPS accounts can be easily maintained online.
• Employees can withdraw 60% of their corpus tax-free on retirement. 
• Allows withdrawals before retirement, permits partial withdrawals after ten years of account initiation and allows three withdrawals until 60.
• Employees can choose their fund managers for better returns.
• PFRDA regularly checks the overall process to keep it transparent and hassle-free. 

Disadvantages of NPS: 

• The pension amount differs for everyone as the pension amount depends upon the type of investment subscriber choose for annuities.
• It is based on market-linked investment and managed by a fund manager so that the pension amount can vary. 

How is NPS Better than the OPS?

• OPS provides fixed pension schemes only to government employees after their retirement. It offers a pension of 50% of their last draw salary and its unchanged pension throughout. 
• NPS is available for government and private sector employees, and it comes with dual investment benefits and a pension scheme. While it doesn’t guarantee returns, it holds the potential for higher earnings due to market dynamics. As retirement nears, the investment balance shifts from stocks to more stable options.
• Unlike the OPS, NPS gives employees tax benefits under sections 80CCD and 80C of the Income-tax Act, 1961.
• In the case of corporate NPS, the company can claim the expense deduction under section 36(i)(iv) of the Act, which was not available earlier for OPS due to it being unavailable for the corporate sector. 

How does the NPS work for government employees?

Following are the NPS investments for government employees:

1. Upto 50% in government securities and related investment (here related investment means T-bills, Government bonds, Zero Coupon Bonds, Gold bonds etc) upto 45% into debt instruments & related investment.
2. Upto 15% in equity & related investment.
3. Upto 5% in short-term debt instruments & related investments.
4. Upto 5% in asset-backed trust structured & miscellaneous investments. 

Only three fund managers can manage government employee NPS funds:

• SBI Pension Fund
• UTI Retirement Solution
• LIC Pension Fund.

Frequently Asked Questions (FAQ’s)