NPS vs OPS - Which One is better?

Retirement planning is one of the key decisions of salaried and self-employed individuals. One of the most important factors affecting this decision is your selected pension plan. The two pension schemes that often get confused with each other are NPS and OPS. Wondering what exactly these pension plans are? Don’t worry, we have got you covered. In the section below we will not only talk about what is NPS and OPS but also identify the differences between the two.

What is NPS?

The National Pension Scheme was introduced by the National Democratic Alliance (NDA) in 2004. Initially, the NPS was directed only at government employees. However, later in 2004, the Pension Fund Regulatory and Development Authority made this scheme extended to all including both salaried and self-employed employees. NPS is a contributory scheme, which means both the employee and the employer make regular contributions to the employee's NPS account during their working years. Thus, under this scheme, individuals can contribute a specific amount of money till 60 years of age. 

Some of the features of NPS are as follows:

• The contributions made towards NPS are regulated by fund managers and PFRDA
• NPS has a two-tier structure Tier-I and Tier-II, Tier-I is a mandatory long-term retirement account while Tier-II is a voluntary savings facility that offers flexibility in terms of withdrawals and contributions
• The contributions made towards NPS are tax exempted as specified under section 80C of the Income Tax Act of 1961
• It is a market-linked annuity plan
• Government employees can contribute 10% of basic salary along with 14% contributed by the Governement of India, while other individuals can contribute a minimum of Rs. 500 every month
• With the NPS scheme, individuals can withdraw 60% of the contributions after they retire and invest the remaining amount of 40%

What is OPS?

OPS or commonly known as Old Pension Scheme is a pension specifically designed for government employees. This scheme is applicable for those who have completed at least 10 years of service. The pension scheme hence drawn is based on the last salary withdrawn. With changes in the Dearness Allowance or DA, the pension amount also gets increased accordingly. Moreover, as the government pays towards OPS which means that no amount is deducted from the individual’s salary. 

Listed below are the features of OPS:

• Employees who joined after 2014 are eligible for getting pension under NPS and not OPS
• This scheme ensures a fixed pension irrespective of market fluctuations or investment performance
• It is a non-contributory pension scheme
• The pension amount received out of OPS is tax-free
• As of February 2023, the Department of Pension and Pensioner’s Welfare allowed the employees of Central Government to choose OPS as their pension scheme
• OPS offers individuals an opportunity to save lump-sum amount post retirement
• The entire pension amount is borne by the Government of India and thus there is no liability on the individuals

NPS vs OPS: Track the Differences

Here are some of the differences between National Pension Scheme (NPS) and Old Pension Scheme (OPS) that you should know about:

Which is Better: NPS or OPS?

When it comes to which is better, NPS or OPS, there are a few things that need to be considered. For instance, if the individual wants to enjoy a greater flexibility in terms of withdrawals and contributions made, then the NPS scheme is suggested. However, on the other hand, OPS is suggested for those looking for a pension scheme that guarantees a lump-sum amount post retirement. Moreover, OPS also provides the benefit of getting the pension amount increased every year, on the basis of increase in Dearness Allowance or DA. So, analyze your post retirement financial requirements and accordingly choose between NPS and OPS. 

Other Pension Schemes Offered by Indian Government

Listed below are three other pension schemes that is offered by the Government of India:

• Atal Pension Yojana (APY): The Atal Pension Yojna or APY is a popular pension scheme under the Government of India. It is regulated by the Pension Fund Regulatory and Development Authority and is eligible for individuals aged between 18-40 years. You can choose the contribution amount ranging from Rs. 1,000 to Rs. 5,000 based on your financial needs.

• Pradhan Mantri Vaya Vandana Yojana: The Pradhan Mantri Vaya Vandana Yojana is not affected by market fluctuations and is thus a popular pension scheme for those with low risk appetite. LIC or Life Insurance Corporation of India operates this scheme and it even offers a loan facility.

• Employee Pension Scheme (EPS): It was introduced by the Employee Provident Fund Organisation in the year 1995. In order to enjoy the benefits of EPS, you need to be a member of EPFO. Moreover, to receive the pension amount, you need to be at least 58 years of age and must have served at least 10 years of service. 

Advantages of the National Pension Scheme (NPS)

There are many benefits of the National Pension Scheme (NPS) for those who are looking forward to a secure retirement plan:

1. One of the best features of NPS is its partial withdrawal system. You can withdraw a partial amount of money from Tier 1 accounts, only after three years of subscriptions, and up to 25 percent is allowed for events like academic purposes, wedding or any medical usage.
2. There are good tax benefits provided by NPS. If you have made a contribution towards the scheme annually, you will be granted a tax deduction of 1,50,000 rupees. 
3. It offers significant diversification when there is a combination of equity and debt investments by NPS. This balance will help you in achieving a good amount of returns and will help you in growing your retirement collection over the coming future.
4. Any person can make contributions multiple times in a financial year, which will be of a minimum 1000 rupees per year for Tier I accounts. If the subscribers are not satisfied with the performance of their fund managers, they can ask to change them once in every financial year.

Disadvantages of the NPS (National Pension System)

There are multiple benefits that have been offered under the NPS scheme but as the benefits come, there are also a few drawbacks that you have to face as an investor:

1. There are many tax disadvantages that come along with the NPS’s initial tax benefits as the plan reaches its maturity age. At maturity age, the NPS’s taxes may increase your tax dues during retirement as 60 percent of the collection is added to taxable income. This factor might degrade your benefits of having this scheme and provide you financial benefits over time.
2. You will have a limited amount of withdrawal options in this scheme. NPS has limits on your withdrawals before the maturity period, as it is mainly meant for your retirement savings
3. NPS will decrease your stock investment slowly as you get older. Your investment in stocks will get reduced every year by 2.5% to lower the risk as you move forward towards your retirement age, starting at age 50. However, this automatically reduced percentage might not turn out to be an ideal plan for those who want to keep a high amount of stock investment, in need of good returns.
4. You are supposed to use at least 40% of your savings from an NPS plan to buy an annuity when your NPS account is matured because it will give you a regular source of income after retirement age. The conditions and the payments from the 40% annuity will be dependent on the provider. The rest of the 60 percent of the NPS scheme amount can be withdrawn as a lump sum amount, even though some people think of this option as restrictive.
5. NPS’s allocation of assets and management of funds can confuse many new investors despite NPS being designed in the simplest way possible. Even though you do not have any background knowledge of finance, it could be hard to understand auto and active choice of details and withdrawing rules and regulations.

Advantages of the Old Pension Scheme (OPS)

There are many benefits of the Old Pension Scheme (NPS) for investors looking forward to a secure retirement plan:

1. One of the best features of this Old Pension Scheme (OPS) is that no amount is deducted from an employee's salary for this scheme and remains unaffected. It allows the employee to get the full amount of salary in their service period.
2. OPS is a government funded scheme, which means it is clear that the government will handle all the expenses that are associated with providing pensions to all the employees who are eligible. This scheme is government-supported, which provides financial stability and security for the retired employees.
3. Another main benefit of owning this scheme is that the pension amount will be determined before using a simple formula. Either the employees will be getting 50 percent of the last basic salary withdrawn along with special allowances or the average of the last ten months salary, whichever turns out to be the higher amount. This method will help you out in determining your OPS pension amount in a fair and secure way with possibly a good amount of returns at your retirement age.
4. One more benefit of taking the OPS scheme is that the amount of pension that is received by the retired employees is tax-sheltered, which means the people who will get pension would not have to pay income tax for the pension they will receive.

Disadvantages of the Old Pension Scheme (OPS):

1. One of the disadvantages of the old pension scheme is that it is becoming financially unstable to continue with OPS as there are no means to fund this growing pension scheme with the existing tax burden. Starting from 2021-20233, the liabilities for state pension represent GDP of 1.2 percent.
2. Providing a price-increased pension to government employees might increase expenses, might make limitations for the fund available for good investment and welfare programs that help such a wide population. A recent study from the RBI is suggesting that going back to the old scheme of pension would be 4.5 percent more expensive than the NPS, with the extra burden of finance reaching 0.9 percent of GDP annually by 2060.
3. Investing for academic and medical purposes is very beneficial for the demographic dividend. However, this will create pressure for the financial resources needed for projects for development. Employees under the OPS scheme create extra burden financially, which will result in decreasing expenditure on social sectors and intensifying poverty among underprivileged people.
4. Shifting the responsibility of funding the pension for retired employees onto the upcoming employees through taxes is very unfair to the future workers. Currently, the burden of indirect taxes is six times more than people’s income and this issue is faced by 50% of the population. The OPS can be seen as a system that provides advantages to individuals who are already financially stable.

Take Away

Thus, as both NPS and OPS have their merits and demerits, you should consider the aforementioned differences while making your decision. You can also consult a financial advisor who will help you in the right way to select a pension scheme.

FAQ

Ques 1: Who is eligible for an old pension scheme in India?

Ans: The OPS scheme is eligible for those people who are retired government employees and those who joined before 1st January 2024. This scheme will offer pension benefits that are based on their last salary received or the average of the last 10 months salary, whichever is higher. 

Ques 2: How can I get 50000 pension per month from NPS?

Ans. You can get a pension of 50000 persian per month from the NPS scheme only if you start investing 6550 rupees per month starting from the age of 25 and keep investing for the next 35 years. Only then will you end up generating a pension of 50000  rupees per month by the time you reach your retirement age.

Ques 3: Does NPS give a lifetime pension?

Ans: Yes, people who took the NPS scheme will receive a monthly pension from this scheme during their lifetime. If any unfortunate event happens, like the scheme holder dies, then the NPS monthly plan stops and the whole amount that was paid for the annuity is given to the nominee.

Ques 4: What is the lock-in period for NPS?

Ans: The lock-in period for the NPS scheme is until the holder turns 60 years old. The holder can do partial withdrawals after 10 years for their specific needs. At the retirement age, at least 40 percent of the fund must be used to buy an annuity, with the rest available for lump-sum withdrawal.