OPS vs NPS: Difference Between Old Pension Scheme and New Pension Scheme, Advantage & Disadvantage

Some states have restored the Old Pension Scheme (OPS) instead of the New Pension Scheme or National Pension Scheme (NPS) for government employees. Both these schemes provide a monthly pension for the Central and State government employees after retirement. 

What is the Old Pension Scheme (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

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. 

Introduction of the National Pension Scheme (NPS) 

However, the National Democratic Alliance (NDA) government discontinued the OPS in 2004 and introduced the National Pension Scheme (NPS) for government employees. The government extended the scope of NPS for all citizens, including self-employed and unorganised 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.

Employees who can opt for the 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.

Old Pension Scheme advantages and disadvantages

Advantages of the OPS:

• It assures life-long income post-retirement.

• 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.

• Employee’s pension increases with the revision of DA twice a year.

• There was no deduction from the salary of employees for pension payments.

• 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.

Disadvantages of the OPS:

• It is a massive pension burden on the Central and State government.

• There is no corpus created for pensions which could grow continuously and reduce the government's liability for pension payments.

• It is unsustainable 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.

National Pension Scheme advantages and disadvantages

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. 

How is NPS better than the Old Pension Scheme?

The OPS provides a fixed amount of pension every month for government employees. They also get the benefit of increases in DA twice a year. For example, if a government employee’s basic monthly salary plus DA at the time of retirement is Rs.10,000, he would be assured of a pension of Rs.5,000 every month. Additionally, the monthly pension increases when the DA increases. If there is an increase of 4% in DA, the monthly pension will increase to Rs.5,200 (An increase of 4% is calculated upon the pension amount, i.e. Rs.5,000). 

However, under the NPS, the pension amount is determined by various factors, such as the amount of contribution, age of joining, type of investment and the income drawn from the investment.

For example, if an employee is 35 and the retirement age is 60, the total investing period will be 25 years. When his basic salary and DA is Rs.10,000, the monthly contribution towards NPS will be Rs.2,400 (10% employee contribution on Rs.10,000, i.e. Rs.1,000 + 14% government contribution on 10,000, i.e. 1,400). 

When the employee becomes 60 years, he will receive a monthly pension of Rs.4,595 when he invests 40% of the accumulated contributions in annuities. He will get the 60% of the accumulated contributions as a lump sum, i.e. Rs.13,78,607. Thus, he will get a monthly pension and a lump sum, which he can re-invest. When he invests 60% of the accumulated contributions in annuities, he will get a monthly pension of Rs.6,893 and get Rs.9,19,071 as a lump sum. 

Raising equity markets favour NPS over the long term. It benefits employees and relieves the government of the burden of pension payout. It gives a pension amount and retirement lump sum as against pension in the OPS. Though OPS looks convenient for employees, experts state that NPS is sustainable for the economy as the government bears the entire risk of inflation and longevity under the OPS.

Difference between Old Pension Scheme(OPS) and NPS

	Old Pension Scheme	National Pension System
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	10% of Basic Pay by Employee to P.F. a/c. Pension will be paid by employer.	10% of B.P+D.A by Employee and 14% by Employer.
	Contribution by Empl. Will be with Dept/Bank/EPF.	Both Employee &Employer  Contribution will be with Fund Managers.
Charges	--NIL---	Charges will be deducted from contribution by POP,CRA,TRUSTEE BANK,CUSTODIAN, FUND MANAGERS etc., Will be charged for each and every transaction and for annual maintenance of a/c, securities. From F.Y. 2021-22 Bank will bear these charges.
Loans	Empl. may raise loan on security of P.F balance, for various needs at any time and repay.	No Loan facility. .
Withdrawals	Can withdraw up to 75% on non refundable basis for ward’s marriage or to construct house after 25 yrs of service.	1.Can withdraw 25% of employees contribution after minimum 10 years of service. Purpose: Marriage of ward, Education expenses for ward, construction of House , Medical Expenses for selected deceases.. 2.In case of VRS,etc., 80% of accumulated wealth will be used for pension/annuity. Only 20% will be given in cash.
Interaction	Easily interact with his own employer /H.O	Has to interact through computer/Internet with NSDL/PFRDA/FUND MANAGER. Difficult to analyze & choose Fund Manager as well as Type of scheme to invest.
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	Employee’s contribution to P.F. a/c is under 80C. P.F. accumulation, Pension, Commutation are fully exempted from Income Tax	Employers contribution is added to Income of the employee, but can be taken as investment apart from 1,50,000 limit under 80CCD(2). On retirement 60% will be paid in cash and is not taxable..   Other 40% will utilised for Pension and is tax free. But, Pension is taxable.
Returns	Empl. Contribution with 8.5% interest and Pension related to Basic Pay with D.A is assured for life.	Both the contributions are invested in Shares/ Debentures/ Govt. Bond No Guarantee on  return.
For Family	On the death of an empl., Family Pension is given to spouse throughout his/her life.	On the death of Empl. Wealth accumulated till date is given to the spouse .