Old pension system vs national pension system: How the two compares and which is a better choice? Which states are protesting to restore to OPS. Read on to get details
Several states are reversing back to the old pension scheme (OPS). Recently, Punjab government said that it is considering restoring OPS for state government employees,
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With this, Punjab might become the fourth state to restore OPS. Chhattisgarh was the first state to announce the OPS. After that, Jharkhand and Rajasthan also announced reverting to the old system.
Thousands of government employees staged a protest recently in Gujarat to call for the reinstatement of the previous pension system. Senior Gujarat Congress leader Arjun Modhwadia said his party would implement the old pension scheme in Gujarat just like Congress governments have done in Chhattisgarh and Rajasthan if it is voted to power in the Assembly polls.
So, what is the old pension scheme?
In the old pension regime, pension was 50 percent of the last drawn salary of the employee and the entire amount was paid by the government.
How is it different from the current one?
The old pension scheme was discontinued on April 1, 2004, and replaced with the National Pension Scheme (NPS).
NPS, a government-run investment scheme, gives the subscriber the option to set the preferred allocation to different asset classes. The returns in NPS are not guaranteed and depend on the performance of the asset allocation by the subscriber based on his/her risk-taking capability during the employment tenure.
Under this scheme, the employees contribute 10 percent of their salary towards pension, and the state government contributes 14 percent. The amount is then deposited with Pension Fund Regulatory and Development Authority (PFRDA), where it is invested.
This table shows the basic difference between OPS and NPS:
|Basis of Difference||NPS||OPS|
|Returns||The returns are not guaranteed and constant as money is invested in market-linked securities.||OPS offers pensions to government employees on the basis of their last drawn salary, which is 50 percent of the last drawn salary. This is fixed.|
|Tax Benefits||Annual investments up to Rs 1.5 lakh are tax-deductible under Section 80C of the Income Tax Act, 1961. Additional annual investments up to Rs 50,000 are tax-deductible under Section 80CCD (1B) of the Income Tax Act, 1961.||No tax benefits are applicable.|
|Tax on pension amount||On retirement, NPS provides a pension fund that is 60 percent tax-free when redeemed. The remainder, which is 40 percent, has to be invested in annuities. This is taxable.||Income from OPS does not attract any tax.|
|Eligibility||All Indian citizens between 18 and 65 years are eligible.||Only government employees are eligible.|
So, which is better, and who will benefit from which?
OPS, as mentioned above, is a pension scheme and offers a regular pension. This is fixed, which is not the case in NPS.
The investments may also be volatile in NPS. Hence, experts believe that NPS is suitable for those willing to take certain risks. However, there are several benefits of NPS which must be considered. It allows one to plan the retirement corpus and offers tax benefits. At times, it can offer decent returns.
On the other hand, OPS is best suited for the ones who are risk-averse and want decent funds at retirement.
First Published: IST