Old Pension Scheme vs NPS: Which One is Better and Why?

The old pension scheme vs NPS is an ongoing debate in India, especially since the National Pension Scheme (NPS) replaced the former in 2004. Initially introduced exclusively for government employees, NPS was extended to all citizens in 2009.

However, NPS has not been an instant success. Many employee associations claimed it was not in the best interest of employees. As a result, some states have chosen to revert to the old pension system.

This article explores both pension schemes, their key differences, and the ongoing discussions surrounding them.

Definition of Old Pension Scheme (OPS)

Before debating the old pension scheme vs NPS, it's important to define the Old Pension Scheme (OPS). OPS is a retirement scheme by the Indian government that allows government employees to receive a monthly pension upon retirement.

• Employees serving at least 10 years in government service are eligible for pension benefits.
• A key feature of OPS is the Dearness Allowance (DA), which is revised twice a year.
• This ensures the pension increases periodically, offering financial stability post-retirement.

Which Government Employees Can Opt for OPS?

With the introduction of NPS, government employees who joined after 2004 were enrolled under NPS by default. However, a one-time opportunity was granted in February 2023 by the Department of Pension and Pensioners’ Welfare (DoPPW) for certain employees to opt for OPS if:

• The central government employee was appointed against a post advertised before 22.12.2003.
• Employees who joined after 01.01.2004 could opt for OPS under this provision.

Advantages of the Old Pension Scheme (OPS)

Understanding the advantages of OPS highlights key differences between the old pension scheme vs NPS:

• Provides life-long earnings after retirement.
• Pension amount increases twice a year with DA revisions.
• No salary deduction for employees.
• Entire pension burden borne by the government.
• Pension linked to pay commission recommendations, protecting against inflation.
• Retirees receive 50% of their last basic salary with DA or the average of the last 10 months’ earnings, whichever is higher.

Disadvantages of the Old Pension Scheme (OPS)

The downsides of OPS further differentiate it from NPS:

• Becomes a huge financial burden for the government.
• Pension liabilities increase every year due to inflation.
• No corpus fund to accumulate contributions and reduce future liabilities.
• Rising life expectancy means the government pays pensions for longer durations.

Definition of National Pension Scheme (NPS)

In 2004, the Indian government discontinued OPS and introduced NPS.

• Available to all citizens: government employees, private-sector workers, self-employed, and unorganised workers.
• Government employees: contribute 10% of basic salary + DA; the government contributes 14%.
• Private sector: minimum contribution is ₹500 per month.

Benefits of the National Pension Scheme (NPS)

To determine whether NPS is better than OPS, consider these NPS advantages:

• Upon retirement, employees can withdraw 60% of the corpus tax-free.
• Tax deductions available under Section 80C and 80CCD.
• Market-linked returns managed by professional fund managers.
• Flexibility to choose fund managers for potentially higher returns.
• Online account management provides ease and transparency.
• Partial withdrawals allowed after 10 years for emergencies.

Disadvantages of the National Pension Scheme (NPS)

Knowing the drawbacks of NPS also helps differentiate it from OPS:

• Employees must contribute 10% of their basic salary plus DA.
• Returns depend on market performance, leading to uncertainty.
• Choosing the right fund manager can be confusing for those unfamiliar with markets.

Summarised Differences Between NPS and Old Pension Scheme

Which Pension Scheme is Better: Old Pension Scheme vs NPS?

Continuing the debate about which is better between OPS and NPS:

• OPS offers a fixed pension limited to government employees.
• NPS provides tax benefits under Sections 80C and 80CCD.
• Corporate NPS allows companies to claim deductions under Section 36(i)(iv) of the Income Tax Act.
• Although NPS does not guarantee returns, it offers the potential for higher returns through market-linked growth.

How Do Government Employees Manage NPS?

Below are the NPS investment options for the government employees:

• They can invest 50% in government securities and related investments such as Gold bonds, Government bonds, T-bills, Zero Coupon Bonds etc.
• Government employees can invest up to 45% on debt and other related investments.
• Upto 15% in related investment and equity.
• Up to 5% into related investment and debt instruments.
• They can invest up to 5% in miscellaneous investments and asset-backed trusts. 

Note: Only three fund managers manage NPS for government employees. These include UTI retirement solution, LIC pension fund and SBI pension fund.

Final Word

The debate around the old pension scheme vs NPS reveals many insights about both systems. While OPS was limited to government employees, NPS is open to all sectors. However, some states like Punjab, Rajasthan, Jharkhand, Himachal Pradesh, and Chhattisgarh have reinstated OPS for their employees.

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Official Sources for NPS and OPS Information:

Department of Pension and Pensioners' Welfare (DoPPW) – OPS Information
National Pension System (NPS) Official Website – PFRDA