Panel to review pension scheme: Difference between NPS and OPS explained

The government has announced setting up of a four-member committee to review the National Pension Scheme (NPS)

The finance ministry on Thursday notified the establishment of a committee to assess the pension system for government employees, in line with finance minister Nirmala Sitharaman's announcement during the amendments to the Finance Bill of 2023 in Parliament.

Meanwhile, certain states ruled by the Opposition have declared a shift for employees covered under the national pension system (NPS) to the old pension scheme that provides 50 per cent of the last drawn salary as pension, while other states, like Maharashtra, where the BJP is part of the ruling alliance, are considering the same move.

But what exactly are these schemes, and how do they differ? Take a look:

 

What is Old Pension Scheme (OPS)?

The old pension scheme, introduced in the 1950s, is exclusive to government employees. It guarantees a monthly pension equivalent to 50 per cent of the last drawn basic salary, along with a dearness allowance upon retirement or an average of the wages earned in the previous ten months, whichever is more favourable. To qualify for these benefits, employees must have completed ten years of service. There is no employee contribution required for this scheme, and income is not taxed.

What is the New Pension Scheme (NPS)?

In contrast, the new pension scheme was introduced in 2004 and is available to both government and private sector employees. Under this scheme, employees must contribute 10 per cent of their base pay, while employers can contribute up to 14 per cent. Participants can also actively engage in the NPS. The scheme offers market-linked returns but does not guarantee returns. At maturity, 60 per cent of the corpus is tax-free, while the remaining 40 per cent is taxable when invested in annuities.

What is the difference between OPS and NPS?

1) The old pension scheme guarantees return certainty by calculating the monthly pension based on the last salary received by the employee. In contrast, the new pension scheme offers market-linked returns that come with no assurance.

2) Regarding tax benefits, the old pension scheme exempts income from taxation. On the other hand, the new pension scheme allows a tax exemption of 60 per cent of the corpus upon maturity, and the remaining 40 per cent is taxable when invested in annuities.

3) The old pension scheme was limited to government employees after retirement, but the new pension scheme is available to all citizens aged between 18 to 65 years.

4) In terms of contributions, the old pension scheme requires monthly payments of 50 per cent of the last salary earned, while the new pension scheme obliges employees to contribute 10 per cent of their salary, with employers having the option of contributing up to 14 per cent.

5) Each of the pension schemes (OPS or NPS) presents its own set of pros and cons. With OPS, there is certainty in returns and tax-free income. However, NPS provides increased autonomy, management, and a chance of yielding higher returns.

What is Andhra Pradesh's Guaranteed Pension Scheme (GPS)

The Guaranteed Pension Scheme (GPS) was initially proposed for Andhra Pradesh in April 2022, promising a guaranteed pension of 33 per cent of the employee's last drawn basic pay without any deductions for state government personnel. Under this proposal, the employees would be required to contribute 10 per cent of their basic salary monthly, which the state government will match.

Alternatively, if the employee chooses to contribute an increased 14 per cent every month, they are entitled to a guaranteed pension of 40 per cent of their last drawn salary.