National Pension System and Old Pension Scheme are two of the most talked about topics recently but differentiating and understanding what’s best between the two is quite Challenging.
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What Is Old Pension Scheme?
The Old Pension Scheme was abolished under pension reforms in 2004. In this scheme the employee was entitled to half the pay of the last service payment with provident fund and other payments given in a lumpsum amount at the time of retirement while the pension was given to the employee throughout his/her lifetime. It was financed by the pay as you go method.
The pay as you go method is based on the fact that the pension is taken from the taxes payed by the younger employees. In way this is seen as a direct transfer from the younger generation to the older generation.
This method is deemed efficient only if the number of people retired is less than the number of people working currently. If the number of people retired is more and the number of people being unemployed is also more than this builds pressure on the economy.
The practice of pension came from the era of British colonization. And then adopted by government of India. Pension liabilities of ops in 2022-23 alone accounts for Rs 2.07 lakh crore for the existing retirees
An employee joining state or central services before 4 January 2004 is entitled to receive ops which is derived from last 10 month of tenure salary and given to employees working for over three decades in government sector.
Although this scheme was abolished some states are not adopting it again meanwhile OPS is still given the defense personals, MP and MLA serving a tenure of 5 years and judges serving a tenure of 12 years.
What Is National Pension System
National pension system is a defined pension system in india regulated by pension fund regulatory and development authority. Mandated to be given to the employees joining after 1 January 2004. This system was then later extended to the private sector also in 2009. NPS is entirely tax free.
40% of the amount is directly tax free while in the remaining 60% the 40% is also tax free as it has to be used to purchase annuity. And the remaining 20% is taxed at slab rates on withdrawal.
WHO CAN JOIN?
- The person should be a citizen of India or a non-residing Indian.
- He/she should be aged between 18 to 70 years old.
- Should not an individual with unsound mind.
- Should comply with KYC norms.
WITHDRAWAL
Premature withdrawal can be made before 60 years of age but only 20% is withdrawn and the remaining 80% is used to purchase annuity. If the scheme is at least 3 years old and the amount to be withdrawn is less than 5 lakhs, then the entirety of it can be withdrawn. And under special circumstances 25 % can be withdrawn prematurely.
ADVANTAGES OF OLD PENSION SCHEME
- OPS provides more cash benefits than NPS.
- OPS covers health insurance and provides the utmost benefits throughout the lifetime of the individual.
- The spouse or daughter of the beneficiary can also avail of the benefits of the pension and can get 50% of the pension after the demise of the beneficiary.
- Offers lifelong income post-retirement.
DISADVANTAGES OF OLD PENSION SCHEME
- Only covers the people at the top 10-15% of the hierarchy.
- Puts a lot of financial burden on the government.
- Unsustainability is a major issue in this scheme as the population of elderly keeps rising and life expectancy too, which incurs the burden on the government as this is an unfunded scheme.
ADVANTAGES OF NEW PENSION SYSTEM
- Benefits are equally distributed to the entire population.
- It covers the entire population regardless of whether they work in the government sector or not.
- Provides tax free income after retirement.
- Provides the ease of opening NPS account.
DISADVANTAGES OF NEW PENSION SCHEME
- The liability to pay for the first batch i.e., people who joined after 2004 will come in 2034 not now.
- Abolition of NPS also has a political angle as the ops is favored by the government employees and they contribute to a huge voter bank for them.
CENTRE ROLLS OUT OLD PENSION SCHEME TO CERTAIN EMPLOYEES FOR A LIMITED TIME
Recently, the central government decided to provide a limited number of central government employees with a one-time choice for the “Old Pension Plan.” According to a notification sent by the Ministry of Personnel, the action was taken in response to different representations, references, and court judgements and involved consultation with the Departments of Financial Services, Personnel & Training, Expenditure, and Legal Affairs.
The Central Civil Services (Pension) Rules, 1972 (now 2021) state that “representations have been received from the government employees appointed on or after January 1, 2004, requesting the extension of the benefit of the pension scheme under the Central Civil Services (Pension) Rules, 1972 (now 2021) on the ground that their appointment was made against the posts or vacancies advertised or notified for recruitment prior to notification for the NPS,
Refers to court rulings from various Honorable High Courts and Honorable Central Administrative Tribunals that grant such benefits to applicants,” the ministry’s order noted.
The decree states that public employees who qualify for the option but decide not to exercise it by the cutoff date will continue to be covered by the National Pension System.
