Old Pension Scheme vs New Pension Scheme:- In December 2003, the BJP-led NDA government ended the Old Pension Program (OPS) then, the government introduced the National Pension System (NPS) to take the place of the previous pension program. On April 1, 2004, the NPS went into force. The NPS and the old pension plan are both distinct from one another. The old pension plan is pension-oriented, whereas the NPS is an investment-based pension plan where a portion of the money is placed in the market to increase returns. The performance of the asset allocation made by the subscriber based on his or her capacity for risk-taking during the employment tenure determines the returns in NPS, which are not guaranteed
Many states are switching back to the previous pension system (OPS). The reintroduction of the Old Pension System (OPS) for government employees for the year 2023 was recently declared by Rajasthan and Chhattisgarh, and Jharkhand. The previous pension plan offers guaranteed income after retirement. In December 2003, when Atal Bihar Vajpayee was the prime minister, the OPS was abolished by the Bharatiya Janata Party-led administration. Starting on April 1, 2004, the National Pension System (NPS) replaced it. The Punjabi government recently said that it is also thinking about switching its staff back to OPS. Punjab would become the fourth state to use the OPS if the proposal is approved.
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What is Old Pension Scheme (OPS)?
Employees in the Old pension scheme (OPS) get, whichever is more favorable to them, 50% of their last drawn basic pay plus a dearness allowance or their average earnings over the previous ten months of employment. The employee shall satisfy a ten-year service requirement. Employees under OPS are exempt from making pension contributions. The promise of a pension after retirement and a family pension was a perk for accepting a job with the government. There was no emphasis put on retirement corpus building. As life expectancy has increased, OPS has become unsustainable for governments.
Some of the features of the Old Pension Scheme (OPS) are as follows:
- After retirement, government employees are guaranteed a fixed monthly income under the previous pension plan.
- The employees are not eligible for any tax benefits.
- It offered a pension equal to half of the last wage received.
- The former pension plan’s income is not subject to tax.
- The only people who can get a pension after retirement under the previous pension system are government employees.
What is New Pension Scheme (NPS)?
The New Pension Program (NPS) is a two-tier contribution-based investment vehicle in which each participant has complete discretion over how to allocate their funds. Investments can be made in four different ways: equities, corporate debt, government bonds, and alternative investment funds. You can pick between active choice and automatic choice as investment strategies. Up to a maximum of 75% of your investments under the active choice, the option must be made in equities before you turn 50. Furthermore, the contribution to alternative investment cannot be greater than 5%. Under auto choice, NPS automatically adjusts the allocation based on the investor’s age.
Savings are combined into a single pension fund, where they are managed by qualified fund managers under the control of the Pension Fund Regulatory & Development Authority (PFRDA), under the investment policies that have been approved. Tier I and Tier II accounts make up the NPS system. Tier II of NPS can be used for withdrawals before maturity, whereas Tier I of NPS prohibits premature withdrawal. The annual minimum contribution for both accounts is Rs 1,000 per person. Government employees who participate in this NPS contribute 10% of their base pay, while their employers may contribute up to 14%. Employees in the private sector are likewise eligible to voluntarily enroll in the NPS, albeit some rules have changed. The customer has a lot more flexibility and a lot more power over her destiny with NPS.
Some of the key features of the Old Pension Scheme and New Pension Program (NPS) are as follows:
- Government employees are eligible for the NPS. Employees in the private sector, however, can also join NPS.
- For the NPS, all citizens between the ages of 18 and 65 are eligible.
- Throughout their employment, employees make contributions to NPS out of their pay. The sum is put into instruments that are tied to the market Under Section 80C of the Income Tax Act of 1961, investments in NPS up to Rs 1.50 lakh are tax deductible.
- Section 80CCD (1B) of the Act permits tax deductions for additional annual investments up to Rs 50,000.
- An employee’s pension can be partially withdrawn in one lump sum after retirement. According to the norm, 60% of the corpus at maturity is tax-free, while the remaining 40% must be invested in annuities for a regular income or pension to avoid paying taxes on it.
- Employees that participate in NPS pay a monthly contribution equal to 10% of their salaries. The government also makes a matching contribution. The employer contribution rate for central government employees has increased to 14% as of April 1, 2019.
- Except for the military forces joined on or after January 1, 2004, NPS is mandatory for Central government employees. The NPS is used by state governments as well for their staff.
Old Pension Scheme vs New Pension Scheme, Know the Difference
The main distinction between Old Pension Scheme vs New Pension Scheme is that the latter invests employee contributions throughout employees’ careers in market securities like equities. “Therefore, unlike the OPS, which provides return certainty by basing the monthly pension on the employee’s last wage received, the NPS creates market-linked returns without any guarantee of returns. The NPS offers a retirement pension fund that is 60% tax-free upon redemption while the remaining 40% must be invested in annuities that are 100% taxable. OPS income is not subject to tax. Finally, while NPS was designed to relieve this necessity, OPS may force governments to reevaluate their economic objectives. Monthly payment under OPS is made that is equivalent to 50% of the last drawn salary.