Old Pension vs New Pension Scheme: OPS vs NPS Know The Difference
A number of states are moving toward returning to their previous pension system (OPS). Recent reports have indicated that the government of Punjab is turning over the possibility of reinstituting OPS for its workforce. Should this plan be implemented, Punjab would become the fourth state in the union to go back to using the OPS. Several Indian states, including Rajasthan, Chhattisgarh, and Jharkhand, have indeed put the previous pension plan into effect. In today’s article, we will know about the Old Pension vs New Pension Scheme and its objectives and benefits.
About Old Pension vs New Pension Scheme
Many states are switching back to the previous pension system. The reintroduction of the old pension system for government workers for the fiscal year 2022–2023 was recently declared by Rajasthan, Chhattisgarh, and Jharkhand. The previous pension plan offered guaranteed income after retirement. In December 2003, under the BJP-led Government and Atal Bihar Vajpayee as the prime minister, the OPS was abolished. Starting on April 1, 2004, the National Pension System (NPS) replaced it. In a broad sense, the NPS and the previous pension system may both be categorized as pension schemes. On the other hand, these two things are not the same. In the next essay, we will explain in detail what the key distinctions are between the two.
What is Old Pension Scheme (OPS)
- Employees are exempt from making contributions to their pensions if their employer participates in the OPS.
- The old pension was closed in 2003.
- When an employee retires in the old pension scheme, they are eligible to receive either 50 percent of their most recently drawn basic salary + dearness allowance or their average wages in the most recent ten months of service, depending on which option is most beneficial to them. The individual has to have a minimum of 10 years of service under their belt.
- The former pension plan guarantees a certain amount of money each month to government workers after they have retired.
- The pension was equal to fifty percent of the most recent wage that was taken out.
- The workers are not eligible for any tax advantages of any kind.
- Income received via the previous pension plan is exempt from taxation.
- After retirement, the previous pension plan is only available to those who worked for the government and were qualified to receive a pension.
- Because of improvements in people’s life expectancies, OPS has become unsustainable for governments.
What is New Pension Scheme (NPS)
- On April 1, 2004, the new pension plan went into force.
- Those who are employed by the government and participate in this NPS pay ten percent of their basic income to the NPS, while their employers contribute up to fourteen percent of the total.
- As of the first of April in 2019, the contribution rate that the employer makes for workers of the central government has been increased to 14 percent.
- Those working in the private sector are still permitted to freely engage in the NPS.
- Regardless of whether the pension fund is invested in stock or debt, a skilled pension fund manager can make certain that greater returns and a bigger retirement corpus are attained.
- If you are not the kind of person who enjoys taking chances, the guaranteed payout option in OPS is definitely going to pique your interest.
- During their time working for the organization, workers pay a portion of their salaries to the NPS. The sum is placed in market-linked products for investment purposes.
- Beneficiaries may deduct an investment in the NPS of up to 1,50,000 rupees from their taxable income.
- Under the provisions of Section 80CCD (1B) of the Act, additional yearly investments of up to Rs 50,000 are eligible for a tax deduction.
- Under the NPS a retiree may take a lump payment from their pension. 60% of the maturity corpus is tax-free, while the remaining 40% must be deposited in annuities for a normal income or pension.
- Participation in the NPS is open to all citizens of the nation between the ages of 18 and 65.
Old Pension vs New Pension Scheme: Know the Difference
- One of the most significant distinctions between the OPS and the NPS is that the latter invests the contributions made by workers over the course of their employment in market instruments such as stocks.
- “Consequently, the NPS creates market-linked returns without any certainty of returns, but the OPS gives such an assurance by basing the monthly stipend on the employee’s most recently received income.” The National Pension System (NPS) offers retirees access to a pension fund that, upon redemption, is exempt from taxation on sixty percent of its value; the remaining forty percent must be invested in an annuity, which is subject to complete taxation.
- There is no tax withheld on OPS income.
- If an interested citizen does not have much ability or capacity to take risks, they must be happy with the NPS system.
New Pension Scheme vs Old Pension Scheme: Which is Better
|NPS is an investment-based pension program that invests some of the money in the market for higher returns.
|OPS is a non Investment based pension program.
|NPS returns aren’t certain.The subscriber’s asset allocation during employment determines returns.
|The previous pension program guaranteed government retirees a monthly payout.
|Government employees and private employees may join the NPS.
|only for government employees.
|This scheme can attract taxes as well.
|No tax Under OPS
|Employees contribute to NPS from their salaries. Market-linked instruments are used.
|50% of the last salary becomes the pension.
|Its involves risk
|Its risk free
|Can have larger returns after retirement but no guarantee can also return smaller than expected
|You will always have the same returns as it depends on the last salary taken.
|Employees give a monthly contribution to their future from their salaries.
|Employees do not have to invest anything from their salaries.
|Plans are stable for the government and beneficial. As the money is already invested by the employee during his working periods.
|This plan is unstable for the government as retired people’s life expectancies increase. It is costly for the government to run such schemes.
Importance of NPS over OPS
The below points indicate the need and importance of NPS over OPS.
- The Center implemented a new pension system for workers (excluding the military) hired after January 1, 2004. Most state governments, save Tamil Nadu and West Bengal, followed suit.
- Growing pension obligations forced the change. It would be catastrophic to reintroduce OPS, argues Ladder7 Financial Advisors founder Suresh Sadagopan.
- OPS, or pay-as-you-go-plan, is an unfunded pension system where current revenues support pension payments, according to a March 2018 SBI research note.
- Long-term trends indicate state pension liabilities rising sharply.
- All state governments’ 12-year CAGR in pension obligations was 34%. As of FY21, the pension outgo as a proportion of revenue collections is 13.2% for all states combined and 29.7% of own tax income,” the study paper added.
- Increased life expectancy has also impacted pension payouts.