The Old Pension Scheme (OPS) is a government approved retirement scheme. Government employees receive a monthly pension under the OPS. It provides a guaranteed pension for government employees who have completed at least ten years of service based on their last drawn basic salary and the years of service.
Under the OPS, the government pays the entire pension amount to government employees after retirement. Therefore, no amount is deducted from employees’s salaries when they are in service.
After retirement, government employees receive the pension amount and the benefit of the revision of Dearness Allowance (DA) twice a year. On the basis of their last drawn salary plus DA, their pensions increase when their DA increases twice a year. Also, OPS applies only to government employees.
Features of Old Pension Scheme
Key feature of OPS are as follows:
- Pension Amount: Under the OPS, retirees receive a pension equal to 50% of their last drawn salary. This fixed percentage provided a predictable income after retirement.
- Family Pension: In the event of the retiree’s death, their family continues to receive the same pension amount as a family pension.
- Gratuity: The scheme entitles employees to a gratuity of up to Rs 20 lakh, offering additional financial support upon retirement.
- No Employee Contribution: Employees do not make any contributions from their salary towards their pension benefits under OPS.
- Dearness Allowance (DA): Adjustments for inflation are made through DA, which is revised every six months on cost-of-living changes.
Eligibility Criteria for Old Pension Scheme
- The applicant should be a citizen of India.
- The applicant should be living Below Poverty Line.
- The applicant should be at least 60 years of age.
Employees who can opt for Old Pension Scheme
When the government introduced the National Pension Scheme (NPS), all employees who joined service after 2014 were covered under the NPS, and they were not eligible to get a pension under OPS post retirement.
But, in February 2023, the Department of Pension and Pensioners Welfare (DoPPW) provided Central Government employees with a one-time option to choose to get pension under the OPS.
To choose the OPS scheme the Central Government Civil Employees who fulfil the below mentioned conditions are eligible:
- Appointed for a vacant post advertised or notified before the NPS notification date (22 December 2003).
- Joined service on or after 1st January 2004.
- Covered under the NPS.
However, it is to be noted that such eligible government employees should file for getting pension under the OPS before 31 August 2023. The employees who do not opt for the one-time option within the given date will continue to be covered under the NPS.
Advantages and Disadvantages of Old Pension Scheme
Advantages of OPS
- Assurity of life-long income post-retirement.
- Retirees receive a pension equal to 50% of their last drawn salary. This fixed percentage provided a predictable income after retirement.
- Employee’s pension increases with the revision of DA twice a year.
- No deduction from the salary of employees for pension payments.
- The government bears the entire expenditure incurred on a pension.
- Retired Government employees and their spouses are provided the guaranteed, inflation and pay commission-indexed pension payments.
Disadvantages of OPS
- Since the government bears the entire expense incurred on a pension, it becomes a massive pension burden on both the state and central governments.
- There is no corpus created for pensions which could grow continuously and reduce the government’s liability for pension payments.
- It cannot be carried for a longer period of time, since the pension liabilities would keep increasing every year.
- Since life expectancy has increased due to better health facilities, resulting in longevity, the government has to bear the extended pension payouts.
What is the National Pension Scheme (NPS)?
The National Pension Scheme (NPS) is a pension system open for all citizens of India. The NPS invests the contributions of its subscribers into various market-linked instruments such as equities and debts and the final pension amount on the performance of these investments. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) in India.
In the NPS, individual savings are pooled into a pension fund, which is invested in a diversified portfolio of assets like government bonds, bills, corporate debentures and shares. The returns on these investments contribute to the growth of the NPS account over a period of time.
Under the NPS, government employees can contribute 10% of their basic salary plus Dearness Allowance (DA) and the government contributes 14% of the basic salary plus DA every month. Other citizens can contribute a minimum of Rs 500 monthly towards NPS.
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Advantages and Disadvantages of National Pension Scheme
Advantages of NPS
- Employees can withdraw 60% of the corpus upon retirement, which is tax-free.
- Employees have more flexibility and control over NPS investments since they can choose the professional fund manager with the highest return.
- NPS accounts can be operated and managed online.
- PFRDA regulates NPS with transparent investment norms, regular performance reviews and monitoring functions of fund managers by NPS trust, making it a safe and trustworthy investment option.
Disadvantages of NPS
- Employees should contribute 10% of their basic salary plus DA towards their monthly pension.
- There is no fixation on the pension amount, since it is paid based on the return on investments made in market-linked instruments managed by professional fund managers.
- Many people are not aware of the financial terms such as equities, debt, securities, etc. Therefore, they may fail to choose the best NPS fund manager for their investments.
Difference between Old Pension Scheme and National Pension Scheme
| Basis | Old Pension Scheme | New Pension Scheme |
|---|---|---|
| Eligible Employees | This scheme is only for government employees. | This scheme is for everyone, aged between 18-60 years. |
| Pension Payment Basis | The pension amount here is the last drawn salary’s 50% amount. | Provides pension based on the investments made in the NPS scheme during their employment. |
| Pension Amount | 50% of the last drawn salary plus DA or the average earnings in the last 10 months of service, whichever is more, is given as pension. | 60% lump sum after retirement and 40% invested in annuities for getting a pension. |
| Pension Fund | The government entirely funds this scheme. | In this scheme, the employee has to contribute from their salary. For corporate NPS, employers also contribute. |
| Tax Benefits | No Tax Benefits | Employees can claim tax deductions of up to 1.5 lakh under Section 80C of income tax and up to Rs 50,000 on other investments under 80CCD(1b). |
| Tax on Pension Amount | The pension amount is tax-free. | 60% of the NPS corpus is tax-free, while the remaining 40% is taxable. |
How is NPS better than the OPS?
- The OPS provides fixed pension schemes only for government employees after their retirement. It offers a pension of 50% of their last drawn salary and its unchanged pension throughout. Also, they get the benefit of increases in DA twice a year.
- NPS is available for government private sector employees and it comes with dual investment benefits and a pension scheme. While it doesn’t guarantee returns, it holds the potential for higher earnings due to market dynamics. As retirement nears, the investment balance shifts from stocks to more stable options.
- NPS gives employees tax benefits under Sections 80CCD and 80C of the Income Tax Act, 1961, as compared to the OPS.
- In the case of corporate NPS, the company can claim the expense deduction under Section 36(i)(iv) of the Act, which was not available earlier for OPS due to it being unavailable for the corporate sector.
Related Articles of OneNDF:
- Unified Pension Scheme (UPS): Eligibility, Benefits and Returns
- National Pension Scheme (NPS): Interest Rate & Eligibility
FAQs
Q.1 What is the Old Age Pension Scheme?
The scheme is a part of the National Social Assistance Programme (NSAP) and provides a monthly pension to citizens who are 60 years or older and live below the poverty line. The monthly pension is Rs 200 up to age 79 and Rs 500 thereafter.
Q.2 How to claim for the Old Pension Scheme?
The application process for OPS are given below:
- One can download UMANG App or visit the website https://web.umang.gov.in/web_new/home.
- The citizen can login using mobile number and OTP.
- Once logged in, citizens can search for NSAP.
- Click on “Apply Online”.
- Fill in the basic details, choose the mode of payment of pension, upload a photo and click on “Submit”.
Q.3 What is the full form of OPS and NPS?
The full form of OPS and NPS is Old Pension Scheme and National or New Pension Scheme respectively.
Q.4 Which states have an Old Pension Scheme?
The states in India that have introduced the Old Pension Scheme for government employees and discontinued the National Pension Scheme are Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal Pradesh.
Q.5 What is the New Pension Scheme (NPS)?
The Central Government Introduced the New Pension Scheme (NPS) also called the National Pension System, for Centre and State government employees on 22 December 2003. The NPS scheme was implemented from 1st January 2004. It is a voluntary retirement cum investment scheme for employees. The NPS contributions are invested in market-linked securities and employees will receive 60% of the accumulated contributions as a lump sum. The remaining 40% will be distributed as a monthly pension.
