NPS vs OPS: Which Pension Scheme is Better? The Difference Between Old Pension Scheme And New Pension Scheme

NPS (National Pension System) and OPS (Old Pension Scheme) are two different pension schemes, with the key difference being that OPS is a non-contributory pension scheme with a guarantee of pension amount while NPS is a contributory pension scheme based on investment returns. The decision between NPS vs OPS would depend on eligibility and individual preferences.

What is the Old Pension Scheme (OPS)?

The Old Pension Scheme refers to a defined benefit pension scheme, which provides pension to eligible government employees as a percentage of the last basic pay drawn. Under the OPS scheme, the employee has a right to receive a pension, which is fully funded by the government. Employees of central and state governments who joined government service before 2004 were eligible for the Old Pension Scheme, although many states have announced their intention to reintroduce OPS for their employees, via notification.

What is the National Pension System (NPS)?

The National Pension System is a defined contribution pension scheme, which requires employees to make regular contributions towards their retirement corpus. The contribution is invested in a mix of equity funds and debt instruments like corporate bonds and government securities. Upon retirement, the employee can withdraw a lump sum and purchase an annuity to get a regular pension.

NPS vs OPS: Difference Between Old Pension Scheme and New Pension Scheme Explained

The differences between NPS and OPS can be summarized across pension calculation, employee contribution, risk and pension, and retirement benefits.

Pension Calculation

The OPS pension is calculated as a defined percentage of the last basic pay drawn, whereas the NPS pension is estimated based on the corpus accumulated under the NPS pension scheme.

Employee Contribution

Under the OPS scheme, there is no contribution from the employee towards their pension, while they normally contribute 10% of their basic pay plus Dearness Allowance (DA) towards the NPS pension scheme, with an additional employer’s contribution.

Investment and Returns

No investment risk is involved in the case of OPS as the government bears all risk in funding the pension. Employees under NPS bear the risk of investment as their returns are market dependent.

Retirement Benefits

OPS provides a regular pension after retirement with dearness relief, while NPS provides a retirement corpus based on investments with a choice between annuity and lump sum at retirement. Overall, NPS is significantly less secure since it depends on the performance of pension fund managers and market conditions.

Risk And Pension Comparison

OPS vs NPS: Pension Scheme With Higher Returns On Investment?

OPS is a pension scheme with guaranteed pension, while NPS pension is market dependent and provides the potential for higher returns.

OPS vs NPS: Pension Scheme With Higher Risk On Investment?

NPS is riskier than OPS because of the market dependence and lack of guarantees.

OPS vs NPS: Pension Security Comparison

OPS provides higher pension security as it is government-backed, whereas NPS is market-linked and does not have any guarantees.

OPS vs NPS: Difference In Tax Benefits Under Pension Schemes

NPS provides tax benefits, with eligible contributions deductible under sections 80CCD(1), 80CCD(1B), and 80CCD(2) of the Income Tax Act, 1961. OPS pension scheme, on the other hand, does not provide any direct tax benefits as the employee does not contribute anything towards the pension. The NPS pension scheme has a negative impact on an employee’s take-home salary due to deductions, while OPS has no effect on take-home pay. The lack of choice between the pension schemes is also a practical difference between NPS and OPS.

NPS vs OPS: Which Pension Scheme is Better?

Both pension schemes are better in certain respects; however, the choice between NPS vs OPS depends on eligibility, pension preferences, and risk appetite. Employees who are eligible for OPS may prefer it over NPS because of guaranteed pension with lower risk. Those with an inclination towards market-linked pensions with potentially higher returns and willing to bear the risk and uncertainty may consider NPS to be a better option.

Can Employees Choose or Switch Between OPS and NPS?

Eligibility for pension schemes mostly depends on the date of joining government employment and whether an employee belongs to central or state governments. Most employees who joined after January 1, 2004, are mandatorily enrolled in NPS, with no direct option to join OPS. A new pension scheme called the Unified Pension Scheme (UPS) has been notified, which was meant to act as an option for switching from NPS to OPS, although the option is now only available for a limited time. Some states have separately notified resumption of OPS. Given the complexity and frequent changes in the pension scheme rules, it is best for employees to check with their respective departments if they have any option.

Frequently Asked Questions About NPS vs OPS

What is the main difference between OPS and NPS?

The main difference between NPS and OPS is that NPS is a contributory pension scheme while OPS is a non-contributory pension scheme with a guaranteed pension as a percentage of the last basic pay.

Which pension scheme provides a higher degree of pension security and guaranteed pension amount?

The Old Pension Scheme provides a pension with guaranteed pension amount while the National Pension Scheme has no guarantees.

Is NPS better than OPS?

Whether NPS is better than OPS or vice versa depends on an individual’s preferences. NPS has the potential to deliver higher returns while OPS has guaranteed pension.

Can government employees switch from NPS to OPS?

Switching from one pension scheme to another is not allowed except where an employee has joined NPS after the introduction of a new scheme called the Unified Pension Scheme (UPS). However, the option to switch from NPS to UPS is only available till a specified date.

Is NPS pension affected by market performance?

Yes, NPS pension is affected by the market performance since the contributions are market-linked.