NPS and OPS

Table of Contents

Context: Several employees of the Union government and Central public sector undertakings are protesting, demanding the restoration of the old pension scheme (OPS).

What is the Old Pension Scheme (OPS)?

The Old Pension Scheme (OPS) is a retirement scheme approved by the government. Government employees receive a monthly pension under the OPS.
It provides a guaranteed pension for government employees who have completed at least ten years of service based on their last drawn basic salary and the years of service.
Under the OPS, the government pays the entire pension amount to government employees after retirement. Thus, no amount is deducted from employees’ salaries when they are in service.
After retirement, government employees receive the pension amount and the benefit of the revision of Dearness Allowance (DA) twice a year.
Since they receive pensions based on their last drawn salary plus DA, their pensions increase when the DA increases twice a year. However, OPS applies only to government employees.

Introduction of the National Pension Scheme (NPS)

The National Democratic Alliance (NDA) government discontinued the OPS in 2004 and introduced the National Pension Scheme (NPS) for government employees.
- The government extended the scope of NPS for all citizens, including self-employed and unorganised workers, in 2009.
- It is a voluntary scheme administered by the Pension Fund Regulatory and Development Authority (PFRDA).
It is a pension scheme where citizens can contribute an amount every month till 60 years and receive a pension after retirement.
Under the NPS, government employees can contribute 10% of their basic salary plus Dearness Allowance (DA), and the government contributes 14% of the basic salary plus DA every month.
- Other citizens can contribute a minimum of Rs.500 monthly towards NPS.
NPS is a market-linked annuity scheme where an individual can invest a regular amount during employment and receive an annuity when they retire.
- The contributions are consolidated into a pension fund, which invests in a diversified portfolio of government bills, bonds, corporate shares, and debentures.
Professional fund managers regulated by the PFRDA, such as SBI, LIC, UTI, etc., manage the NPS investments.
- Upon retirement, an individual can withdraw up to 60% of the NPS amount and invest the remaining 40% with any of the ten professional fund managers to receive pension annuities as a monthly pension.

Difference between Old Pension Scheme and National Pension Scheme

Particulars	Old Pension Scheme	New Pension Scheme
Eligible employees	Only government employees	Government employees, individual citizens between 18-60 years and NRIs
Pension payment basis	Provides pensions to government employees based on their last drawn salary plus DA	Provides pension based on the investments made in the NPS scheme during their employment
Pension amount	50% of the last drawn salary plus DA or the average earnings in the last 10 months of service, whichever is more, is given as a pension	60% lump sum after retirement and 40% invested in annuities for getting a pension
Contribution amount	Employees don’t contribute any amount	Government employees contribute 10% of their salary (basic + dearness allowance), and the government contributes 14%
Income tax benefits	No tax benefits	Employees can claim tax deductions of up to 1.5 lakh under Section 80C of income tax and up to Rs.50,000 on other investments under 80CCD (1b)
Tax on pension amount	The pension amount is tax-free	60% of the NPS corpus is tax-free, while the remaining 40% is taxable

Old Pension Scheme advantages and disadvantages

Advantages of the OPS

Disadvantages of the OPS

It assures life-long income post-retirement.
Employees get a pension under a predetermined formula, i.e., 50% of the last drawn basic salary plus DA or the average earnings in the last ten months of service, whichever is more.
Employee’s pension increases with the revision of DA twice a year.
There was no deduction from the salary of employees for pension payments.
The government bears the expenditure incurred on a pension.
It provides guaranteed, inflation and pay commission-indexed pension payments to retired government employees and their spouses.

It is a massive pension burden on the Central and State government.
There is no corpus created for pensions which could grow continuously and reduce the government’s liability for pension payments.
It is unsustainable since the pension liabilities would keep increasing every year.
Since life expectancy has increased due to better health facilities, resulting in longevity, the government has to bear the extended pension payouts.

National Pension Scheme advantages and disadvantages

Advantages of NPS

Disadvantages of NPS

Employees can withdraw 60% of the corpus upon retirement, which is tax-free.
Employees have more flexibility and control over NPS investments since they can choose the professional fund manager with the highest return.
It provides higher returns regardless of equity or debt since qualified professional fund managers manage the NPS investments.
A tax deduction is available for NPS contributions made every year during employment.
PFRDA regulates NPS with transparent investment norms, regular performance reviews and monitoring of fund managers by NPS trust, making it a safe investment option.
NPS accounts can be operated and managed online.
Employees can withdraw the NPS contributions before retirement. They can withdraw a certain amount after ten years of opening the account, and three withdrawals are allowed till they reach 60 years.

Employees should contribute 10% of their basic salary plus DA towards their monthly pension.
The pension amount is not fixed since it is paid based on the return on investments made in market-linked instruments managed by professional fund managers.
Many people are unaware of financial terms, such as equities, debt, securities, etc. Hence, they may fail to choose the best NPS fund manager for their investments.