New pension scheme vs old pension scheme: Several states are returning to the old pension scheme. The Punjab government recently announced that they are planning about going back to OPS for its employees. Punjab will become the fourth state to switch back to the OPS if the idea were to pass. The old pension scheme is already in place in states like Rajasthan, Chhattisgarh, and Jharkhand.
What is Old pension scheme (OPS)?
- Employees of the OPS are entitled to receive 50% of their last drawn basic salary plus a dearness allowance upon retirement, or their average wages over the previous ten months of employment, whichever is more favourable to them. The employee shall satisfy a ten-year service requirement.
- Employees under OPS are exempt from making pension contributions. The promise of a pension after retirement and a family pension was a perk for accepting a job with the government.
- There was no emphasis put on retirement corpus building. As life expectancy has increased, OPS has become unsustainable for governments.
What is New pension scheme (NPS)?
- In this NPS, those who work for the government contribute 10% of their base pay, while their employers can contribute up to 14%.
- Although some rules have changed, private sector employees are also able to actively participate in the NPS.
- With NPS, the consumer has a lot more freedom and feels more in control of her destiny.
- Regardless of stock or debt, a seasoned pension fund manager can make sure that higher returns and a greater retirement corpus are realised.
The old pension scheme was ended by the NDA government in December 2003. The new pension scheme came into effect on April 1, 2004.
New pension scheme vs old pension scheme
|New Pension Scheme||Old Pension Scheme|
|Old Pension Scheme (OPS) provides return certainty by basing the monthly pension on the last wage received by the employee.||New Pension Scheme (NPS) creates market-linked returns without any guarantee of returns.|
|Old Pension Scheme (OPS) income is not a subject to the taxation system.||The New Pension Scheme (NPS) gives a retirement pension fund that is 60% tax-free upon redemption while the remaining is 40%, which has to be invested in annuities that are 100% taxable.|
|Old Pension Scheme may be able to force governments to reevaluate their economic objectives.||New Pension Scheme was designed to relieve this necessity of economic objectives.|
|Monthly payment under OPS is made that is equivalent to 50% of the last salary drawn.||Employees that participate in New Pension Scheme pay a monthly amount equal to 10% of their salaries|