Retirement is the time when you wouldn’t want to be indulged in worries. And you can only have a peaceful old age when you are financially independent. This is because you won’t be having an active income source after retirement but still need to manage your lifestyle expenses.
So, this is where pension plans come into play. Pension is the monthly payout you receive after retirement to carry out your expenses. Now, the National Pension System (NPS) and Old Pension System (OPS) are two such very different instruments that can provide you with monthly pensions.
There has been widespread confusion about the two plans. A lot of people prefer OPS while certain individuals find NPS to be highly beneficial. It’s better to see the difference for ourselves and then decide. So, without ruminating much let’s start with it!
What is the National Pension Scheme?
National Pension Scheme / System (NPS) was launched as the New Pension System in January 2004. This scheme was meant to provide you with a monthly pension once you retire. It is available for all Indian citizens including government, private sector employees and self-employed individuals as well. NRIs can take up this plan as well.
The scheme requires you to make a 10% contribution every month and the government will contribute the same 10%. The investment will be put into certain asset classes and at the end, a corpus will be generated. 60% of this corpus can be withdrawn after retirement and the rest 40% is used to buy an annuity. This annuity serves you with the monthly pension payouts.
What is the Old Pension Scheme?
Old Pension Scheme (OPS) is the pension scheme that ran before the introduction of NPS. Under this scheme, the Government takes up the entire contribution towards the pension payouts. The employee doesn’t need to pay anything into their OPS.
This scheme was available only to the Government employees. After retirement, the pension payout is the sum of the employee’s last working month’s salary and some other allowances. So, this scheme is pretty convenient for the Government employees.
Points of Difference between NPS and OPS
NPS and OPS, both are retirement schemes to provide you with monthly pension. But, some major points of difference make the two schemes very different from one another. These are listed below:
1. Eligibility Criteria
All Indian citizens and NRIs can take up the NPS scheme. That includes both the Government as well as the private-sector employees. Even self-employed individuals can subscribe to NPS.
But, OPS is for Government employees only.
2. Pension Payout
The monthly pension payments made after retirement with an NPS scheme depend on the corpus generated. Now, the corpus generated at the end of the investment tenure depends on the market-linked instruments’ performance. So, the monthly payouts in case of an NPS are variable.
On the other hand, the monthly pension you receive post-retirement with an OPS is fixed. It is composed of half of your last month’s salary, dearness allowance, and pay commission (if any).
3. Risk Involved
NPS is affected by market-linked risks. It depends on how well your assets perform in the market. But, OPS delivers you with the promised pension amount.
In the case of NPS, you need to make a 10% contribution from your salary, but the government will also contribute the same 10%. But, the employee doesn’t need to contribute anything with an NPS, the government is responsible for that.
5. Tax Benefits
The contributions you make towards NPS are eligible for tax benefits under Section 80C, Section 80CCD (1B), and Section 80CCD (2). That sums up to a maximum of INR 2 lakhs exemption. Upon maturity, 60% of the corpus can be withdrawn which is taxable and the rest 40% is put into an annuity.
The latter is tax-exempt but the income you receive from the annuity is taxable as per your income slab. On the other hand, you don’t have to contribute anything into your OPS account, so no tax benefits there. But, your monthly pension does get taxed as per your income slab.
6. Minimum Pension Payout
The minimum pension payout in case of an OPS is INR 9000 plus the dearness allowance. While, for NPS, there is no such minimum pension payment. This is because the pension payment depends on the corpus collected which in turn depends on the performance of the market-linked investments.
NPS Vs OPS
|Full-Form||National Pension Scheme. Earlier known as the New Pension Scheme||Old Pension Scheme|
|Contribution||The subscriber needs to contribute 10% of their salary + DA and the Government will contribute the same 10% every month. But, for Central Government employees, the Government’s contribution has been increased to 14%||No contribution from the employee’s side. The entire contribution is made by the Government.|
|Pension payout||Variable. Depends on the performance of the annuity you have invested in after retirement.||50% of the employee’s last month’s salary + Dearness Allowance + Pay Commission|
|Risk associated||Risk involved. The pension payout depends on the performance of the market-linked instruments and after retirement on the annuity performance.||No risk involved.|
|Minimum pension payout||Not fixed||INR 9,000 + Dearness Allowance|
|Who can take up the scheme||Anybody||Only the Government employees|
|Ideal for||Private sector employees + Self-employed individuals||Government employees|
|Tax Benefits||You can withdraw 60% of the NPS corpus at maturity which is taxable. Rest 40% goes into buying a tax-free annuity. But, the income generated from the annuity is taxable.||Pension payouts are taxable as per your income slab|
Is OPS better than NPS?
National Pension System was launched back in January 2004 as a replacement to the Old Pension Scheme (OPS). The OPS system involved the Government handing pension payouts to every Government employee after their retirement. In this case, the entire pension amount was contributed by the Government and there was no contribution made from the employee’s side. Now, that was becoming a bit too much to handle for the government.
On the other hand, with NPS, 10% contribution was made by the employee and the same 10% was contributed by the Government. Also, the investment made into the NPS scheme goes into various types of assets including Government securities. So, the Government is in a win-win situation here.
But, the situation is not that happy for the employees or subscribers. The government employees earlier used to get half of their last month’s salary plus the DA as their monthly pension. With NPS, that need not be the case. Often, they would receive far less than half of their salaries. While they might also end up receiving much more than that.
The point is that with NPS, your pension is not guaranteed. Suppose the performance of market-linked instruments in which your NPS is invested in, declines. Then the returns received will be less.
This is what many are finding problematic. On the other hand, the NPS scheme has proven to be very beneficial for private-sector employees. Earlier, they didn’t have any such source to receive monthly pensions from and had to rely on their savings completely.
Another thing to consider is that equity-linked instruments prove to be beneficial in the long run. Lastly, NPS investments help to save you a lot on your taxes.