Back to Blog
Retirement planning is significant for your golden years. Investors choose a retirement plan or a pension scheme to meet their post-retirement daily expenses and financial dreams. The Indian pension system has gone through many changes over the years. There are two major retirement plans: an old pension scheme and a new one. In this blog, we’ll explore the key differences between the two.
Old Pension Scheme: An Overview
The Old Pension Scheme (OPS) was a traditional retirement savings plan, introduced in the 1950s for government employees. Under the scheme, beneficiaries receive a fixed pension of 50% of their last drawn basic salary, or the average of their last ten months’ salary, whichever is more beneficial. A key advantage of OPS is that it does not require any employee contributions, and the pension is guaranteed. To qualify, employees must complete a minimum of ten years of service. Additionally, the income received under this scheme is tax-free.
National Pension System (NPS)
The National Pension System, also known as the new pension scheme was also introduced by the Government of India but unlike OPS, NPS is available to both government and private sector employees. Under this system, subscribers need to contribute regularly to receive benefits in post-retirement years. The NPS offers market-linked returns as it invests in a diverse range of asset classes such as equities, bonds, securities, and AIFs.
An NPS subscriber can choose their asset allocation as their risk appetite and financial goals. Upon retirement, 60% of the accumulated corpus is tax-free, while the remaining 40% must be used to buy annuities to receive a regular pension. Any Indian citizen between the ages of 18 and 70 can invest in NPS. Moreover, the change in job or location doesn’t impact their potential returns.
One of the benefits of NPS is its flexibility. Subscribers can choose their asset allocation, potentially earning higher returns. Upon maturity, 60% of the accumulated corpus is tax-free, while the remaining 40% must be invested in annuities, which are 100% taxable.
What are the 5 tax benefits under the new pension scheme? Interested? Read them here.
Key Differences Between OPS and NPS
| Feature | Old Pension Scheme (OPS) | New Pension Scheme (NPS) |
| Returns | Fixed returns based on the last drawn salary. | Market-linked returns. |
| Tax-Benefits | Tax-free | 60% of the accumulated corpus is tax-free, and the rest 40% is taxable. |
| Eligibility | It is only available for government employees. | NPS is open to every citizen of India aged 18-70. |
| Contributions | Employees don’t need to contribute. It is government-funded. | Employees and employers can both contribute to NPS. |
| Flexibility | Fixed monthly pension with no investment preferences. | Investment preferences are available for better potential returns. |
| Investment | You cannot decide your contribution amount. It is fixed by the Government of India. | In NPS, subscribers have the leverage to choose their investment amount. |
Final Thoughts
Both retirement schemes have their own set of benefits, but OPS is only available to government employees; however, it is only available to those employees who have joined on or before January 1, 2004. On the other hand, NPS is available to everyone as it comes with more flexibility and the potential for high returns. Individuals should assess their risk tolerance, investment horizon, and financial goals before choosing any pension plan or scheme.
