Old Pension Scheme vs New Pension Scheme: Know The Differences

Recently, Rajasthan and Chhattisgarh announced the restoration of the old pension scheme (OPS) for government employees for the year 2022-2023. The old pension scheme provides assured income after retirement. The OPS was removed by the Bharatiya Janata Party-led government in December 2003, when Atal Bihar Vajpayee was the prime minister. In its place, the National Pension System (NPS) took effect from April 1, 2004.

Let’s understand the NPS structure to understand how it’s different from OPS.

What is NPS?

NPS is a two-tier contribution-based investment vehicle in which an individual has full authority to decide where to invest his or her money.

There are four investing options, including equity, corporate debt, government bond and alternative investment funds. There are two modes of investment you can choose between—active choice and auto choice. Under active choice, you can choose your own combination of investing options, with a maximum of 75 per cent in equities up to age 50. Also, the contribution to alternative investment cannot exceed 5 per cent. Under auto choice, the allocation is made as per the investor’s age automatically by NPS.

The savings are pooled into one pension fund which are invested by professional fund managers regulated by the Pension Fund Regulatory & Development Authority (PFRDA), as per the approved investment guidelines.

The structure of NPS has two types of accounts—Tier I and Tier II. While Tier I of NPS does not allow you premature withdrawal, Tier II can be used for withdrawals before maturity. The minimum contribution for any individual is Rs 1,000 annually for both the accounts.

Resident as well as non-resident Indians in the age group of 18-60 years (as on the date of submission of NPS application) can invest.

NPS also offers tax benefits. You can claim tax deduction of up to Rs 1.5 lakh under Section 80C of the Income-tax Act, 1961. An additional deduction of Rs 50,000 is available for investments under 80CCD (1b).

Once NPS matures at the age of 60 years, you can withdraw 60 per cent of the proceeds as lump sum. This sum was taxable earlier but is now tax-free. The remaining 40 per cent needs to be mandatorily invested in annuities listed by PFRDA. The income from these annuity instruments are fully taxable in the hands of the investors.

OPS vs NPS

The key differences between OPS and NPS are that NPS invests employees’ contributions over the length of their careers in market securities such as equities. “Thus the NPS generates market-linked returns without any assurance of returns, which the OPS provides by basing the monthly pension on the last salary drawn by the employee. NPS provides a pension fund on retirement which is 60 per cent tax-free on redemption while the rest needs to be invested in annuity which is fully taxable. Income from OPS is not taxed. Lastly, OPS may require governments to revisit their fiscal priorities while NPS was meant to ease that very requirement,” says Adhil Shetty, CEO, Bankbazaar.com.

Under OPS, there is a monthly payment, which is equal to fifty per cent of last drawn salary.