What is Old Pension Scheme (OPS)?
Under the Official Pay Structure (OPS), the pension given
to government employees, both at the central and state levels, was determined
to be 50 percent of their last drawn basic pay, similar to the structure in the
Universal Pay Structure (UPS). Furthermore, a Dearness Allowance (DA) was
included, calculated as a portion of the basic salary, to compensate for the
consistent rise in the cost of living. So, every time the government increases
your Dearness Allowance, the government also hikes the Dearness Relief for
retirees.
Under the regulations, OPS guarantees that upon retirement,
an employee will receive 50% of their salary as a pension. Within OPS, there is
a mechanism in place known as the General Provident Fund (GPF), which enables
employees to set aside a portion of their income. This amount is later repaid
with accumulated interest upon their retirement.
Moreover, within OPS, employees are entitled to a gratuity
payment of a maximum of Rs 20 lakh.
Payments facilitated by OPS are executed through the
government treasury, ensuring that pensions are directly financed by the
government. Should a retired employee pass away, their family receives continued
pension benefits. Noteworthy is the fact that no deductions are made from an
employee’s salary for the purpose of pension contributions under OPS.
The Old Pension Scheme (OPS) is a retirement scheme
approved by the government. 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. Thus, no amount is deducted
from employees’ 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.
Since they receive pensions based on their last drawn salary plus DA, their
pensions increase when the DA increases twice a year. However, OPS applies only
to government employees.
Employees Who Can opt For Old Pension Scheme
When the government introduced NPS, all employees who
joined service after 2014 were covered under the NPS, and they were not
eligible to get a pension under OPS after their retirement.
However, in February 2023, the Department of Pension and
Pensioner’s Welfare (DoPPW) provided Central Government employees with a
one-time option to choose to get a pension under the OPS.
The Central Government civil employees who fulfil the below
conditions can choose the OPS:
- Appointed
for a vacant post advertised or notified before the NPS notification date,
i.e. 22.12.2003
- Joined
service on or after 01.01.2004
- Covered
under the NPS
However, such eligible government employees should file for
getting pension under the OPS before 31.08.2023. The employees who do not
choose the one-time option within 31.08.2023 will continue to be covered under
the NPS.
Advantages and Disadvantages of OPS
|
Advantages
of the OPS |
Disadvantages
of the OPS |
|
It assures life-long
income post-retirement. |
It is a massive
pension burden on the Central and State government.
|
|
Employees get a
pension under a predetermined formula, i.e. 50% of the last drawn basic
salary plus DA or the average earnings in the last ten months of service,
whichever is more |
There is no corpus
created for pensions which could grow continuously and reduce the
government’s liability for pension payments.
|
|
Employee’s
pension increases with the revision of DA twice a year. |
It is unsustainable
since the pension liabilities would keep increasing every year |
|
There was no
deduction from the salary of employees for pension payments. |
Since
life expectancy has increased due to better health facilities, resulting in
longevity, the government has to bear the extended pension payouts.
|
|
The
government bears the expenditure incurred on a pension. |
|
|
It
provides guaranteed, inflation and pay commission-indexed pension payments to
retired government employees and their spouses. |
|
What is National Pension Scheme (NPS)?
First floated in January 2004, the National Pension Scheme
(NPS) was initially established as a retirement plan exclusively for government
employees, but in 2009, it was expanded to cover all sectors. Governed jointly
by the government and the Pension Fund Regulatory and Development Authority
(PFRDA), the NPS is a long-term, voluntary investment program designed for
retirement purposes.
Features of NPS
The NPS offers a pension alongside the potential for considerable
investment growth. Upon reaching retirement age, subscribers have the choice to
withdraw a portion of their accumulated savings, while the remaining sum is
distributed as a monthly income, ensuring a regular income stream
post-retirement.
The National Pension Scheme comprises two tiers: Tier 1
accounts and Tier 2 accounts. Tier 1 account holders can only withdraw funds
after retirement, whereas Tier 2 accounts allow for early withdrawals,
providing more flexibility for investors.
Under NPS, individuals are eligible to withdraw 60% of the
total corpus accumulated during their active employment years upon reaching
retirement age, and this withdrawal is exempt from taxation. The remaining 40%
is typically utilized to purchase an annuity product, which presently offers a
pension amounting to around 35% of the individual’s final salary before
retirement.
Under Section 80 CCD of the Income Tax Act, individuals can avail tax
benefits by investing in the National Pension System (NPS) up to a maximum
limit of Rs 1.5 lakh.
Furthermore, withdrawing 60 percent of the NPS corpus upon
retirement can be done tax-free, making it an attractive option for retirement
planning. This feature offers the potential for a lump sum payout, adding to
its appeal as a retirement savings vehicle.
More About NPS
The government extended the scope of NPS for all citizens,
including self-employed and unorganized workers, in 2009. It is a pension
scheme where citizens can contribute an amount every month till 60 years and
receive a pension after retirement.
The government launched the NPS as an alternative to the
existing OPS to provide citizens with a secure and stable retirement income. However,
it is a voluntary scheme administered by the Pension Fund Regulatory and
Development Authority (PFRDA).
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.
NPS is a market-linked annuity scheme where an individual
can invest a regular amount during employment and receive an annuity when they
retire. The contributions are consolidated into a pension fund, which invests
in a diversified portfolio of government bills, bonds, corporate shares, and
debentures.
Professional fund
managers regulated by the PFRDA, such as SBI, LIC, UTI, etc., manage
the NPS investments. Upon retirement, an individual can withdraw up to 60% of
the NPS amount and invest the remaining 40% with any of the ten professional
fund managers to receive pension annuities as a monthly pension.
Advantages and Disadvantages of NPS
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.
- It
provides higher returns regardless of equity or debt since qualified
professional fund managers manage the NPS investments.
- A
tax deduction is available for NPS contributions made every year during
employment.
- PFRDA
regulates NPS with transparent investment norms, regular performance
reviews and monitoring of fund managers by NPS trust, making it a safe
investment option.
- NPS
accounts can be operated and managed online.
- Employees
can withdraw the NPS contributions before retirement. They can withdraw a
certain amount after ten years of opening the account, and three
withdrawals are allowed till they reach 60 years.
Disadvantages of NPS:
- Employees
should contribute 10% of their basic salary plus DA towards their monthly
pension.
- The
pension amount is not fixed since it is paid based on the return on
investments made in market-linked instruments managed by professional fund
managers.
- Many
people are unaware of financial terms, such as equities, debt, securities,
etc. Hence, they may fail to choose the best NPS fund manager for their
investments.
Difference between OPS and NPS
|
Particulars |
Old Pension Scheme |
New Pension Scheme |
|
Eligible employees |
Only government employees |
Government employees, individual citizens between 18-60
years and NRIs |
|
Pension payment basis |
Provides pensions to government employees based on their
last drawn salary plus DA |
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 a
pension |
60% lump sum after retirement and 40% invested in
annuities for getting a pension |
|
Contribution amount |
Employees don’t contribute any amount |
Government employees contribute 10% of their salary
(basic + dearness allowance), and the government contributes 14% |
|
Income 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 |
What is Unified Pension Scheme (UPS)?
The new pension scheme announced by Union Minister Ashwini
Vaishnaw guaranteed an assured minimum pension of Rs 10,000 per month
on superannuation after a minimum of 10 years of service. This option scheme
will benefit 23 lakh central government employees, he said. As per the scheme,
the employees’ contribution will, however, remain unchanged at 10 per cent of
basic pay plus dearness allowance. Coming into effect from April 1, 2025, the
UPS will be accessible to those who have completed 25 years of service in the government.
Other key features of the scheme include a family pension
to the spouse equal to 60 per cent of an employee’s pension income after death, a minimum pension of Rs 10,000 for those who have completed a minimum 10 years of service, inflation indexation to take care of price rise of goods and services, and a facility to withdraw a lump sum amount at retirement.
The Central Government has launched the Unified Pension Scheme (UPS), which provides government workers with a steady pension based on their length of service and most recent basic salary drawn.
According to the media reports, central government
employees can select between the Unified Pension Scheme (UPS) and the National
Pension Scheme (NPS). Additionally, current NPS subscribers of the central
government will have the choice to transfer to the UPS. State governments will
also be able to choose to implement the Unified Pension Scheme shortly.
Comparision Between UPS and NPS
- UPS
comes with the promise of an assured pension. Those who have opted for NPS
will be permitted to switch to UPS following year.
Meanwhile, NPS is a market-linked
defined contribution scheme. Because the funds in NPS are invested in the
market, the pension amount is not fixed and may vary based on market
conditions.
- Under
the NPS, the employee contributed 10 per cent of their basic salary, while
the government matched it with a 14 per cent contribution. UPS takes the
government’s contribution to 18.5%, while the employees will keep on
contributing 10 per cent of their basic pay and DA.
- Employees
contributing to NPS are eligible for tax deductions
of up to 10 per cent of their salary (Basic + DA) under Section 80 CCD(1),
within the overall limit of ₹1.5 lakh under Section 80 CCE, Mint reported.
Additionally, they can claim an extra deduction of up to Rs 50,000 under
Section 80 CCD(1B), beyond the Rs 1.5 lakh ceiling under Section 80 CCE.
The tax benefits under the UPS are yet to be announced.
- While
UPS is just for government employees who have opted for NPS, private
employees could also opt for NPS if their employer had adopted the
contribution. Alternatively, any Indian citizen between the ages of
18 and 70 can voluntarily choose to enroll in the NPS.
Key Features of UPS
1. Under the Unified Pension Scheme, there will be a
provision of a fixed assured pension, unlike the New Pension Scheme (NPS) which
does not promise a fixed pension amount.
2. Under this scheme, individuals will be eligible
to draw 50% of their average basic pay earned during the last 12 months
preceding retirement. To qualify for this benefit, individuals must have
completed a minimum of 25 years of service.
3. The Unified Pension Scheme has five pillars: Assured
Pension, Assured Family Pension, Assured Minimum Pension, Inflation Indexation,
and Gratuity
4. Assured Pension: Under the Unified Pension Scheme (UPS),
the fixed pension amount awarded will be 50% of the average basic pay received
during the last 12 months before retirement for individuals with a minimum
qualifying service of 25 years. This pension amount will be adjusted
proportionately for individuals with lesser years of service, with a minimum of
10 years of service being required to qualify for the pension.
5. Assured Family Pension: The retirement benefits package
includes an assured family pension, amounting to 60% of the employee’s basic
pay. This pension will be disbursed promptly in the event of the employee’s
passing.
6. Assured Minimum Pension: In the situation of
superannuation following at least 10 years of service, the Uniform Pension
System (UPS) includes a guarantee of a minimum pension amounting to Rs 10,000
per month.
7. Inflation Indexation: The indexation benefit is a
provision that applies to assured pension, assured family pension, and assured
minimum pension. This benefit ensures that these pensions are adjusted to keep
up with inflation and changes in the cost of living over time. When indexed,
these pensions are periodically reviewed and adjusted to maintain their real
value and purchasing power for the beneficiaries.
8. Gratuity: Upon superannuation, an employee is entitled
to receive a lump-sum payment along with gratuity. This lump-sum payment is
calculated as 1/10th of the monthly emolument (pay + dearness allowance), which
includes both pay and dearness allowance, as of the superannuation date for
every six months of completed service. Importantly, this payment does not
diminish the amount of assured pension the employee will receive.
9. The UPS is designed to provide financial security and
support to employees even after their demise. It guarantees 60% of the pension
to be immediately transferred to the employee’s family as a family pension,
similar to the benefits offered by OPS. Additionally, after completing 10 years
of service, employees under the UPS are assured a minimum pension of Rs 10,000
per month.
10. It’s important to note that the UPS differs from the
Guaranteed Pension Scheme proposal that was under consideration by the Andhra
Pradesh government. The proposed Guaranteed Pension Scheme aimed to provide a
pension amounting to 33% of the last drawn salary to employees.
What to Choose?
The new Unified Pension Scheme (UPS) offers a combination
of benefits that combine elements from the Older Pension Scheme (OPS) and the
National Pension Scheme (NPS).
From the OPS, the UPS incorporates features such as an
assured pension, inflation indexation, family pension, and a minimum pension.
These aspects provide a sense of security and stability to members
post-retirement.
Additionally, the UPS also adopts a key feature from the
NPS, which is a contributory, fully funded scheme. This ensures that members
have the opportunity to contribute towards their pension fund, leading to a
more personalized and potentially higher pension payout upon retirement
Discover more from YOUR SMART CLASS
Subscribe to get the latest posts sent to your email.
