NPS Vs OPS Differences – New or Old Pension in India (2023)

Do you know what is the difference between old and new pension schemes in India (2023)? That is, do you know why many people still favour the old pension system in the debate of NPS vs OPS?

Do you know what is the difference between old and new pension schemes in India (2023)? That is, do you know why many people still favor the old pension system in the debate of NPS vs OPS?

While both NPS or OPS are retirement savings scheme, there is a fundamental difference between the two. Let’s compare the two schemes in more detail.

NPS Vs OPS: What are the Differences (2023)?

  • Old Pension Scheme (OPS) is a Defined-Benefit scheme while New Pension Scheme (NPS) is based on the Defined-Contribution approach.
  • OPS offered pension to government employees that were based on their last drawn salary. To be exact, equal to 50% of the last drawn monthly salary was to become their starting monthly pension income, followed by indexed dearness relief. This pension income from OPS was tax-free. NPS pension, on the other hand, depends on the NPS corpus accumulated (which depends on the returns generated by different market-linked instruments under schemes G, C, E and A) and the annuity rate on the part of the corpus (minimum 40%) which is used to purchase the annuity. This annuity pension income is taxable. To know more about NPS, check this Detailed Guide on NPS in India.
  • Since 2004, OPS was discontinued and the government of India promoted NPS as the new system for pension in India.
  • What about the tax benefits of NPS vs OPS? No tax benefits are available for OPS while tax benefits of up to Rs 1.5 lakh under Section 80C and additional Rs 50,000 under Section 80CCD are available for NPS contributions every year.
  • While OPS was only available for the government employees, NPS allows all citizens of India to accumulate NPS corpus for getting a pension in future.

So these are the key major difference between OPS and NPS.

Why OPS was Replaced by NPS in 2004?

Before 2004, the government employees had a very benevolent pension system under the OPS regime. But due to the growing pension bill which was bound to get out of hand in years to come, the National Pension System (NPS) was launched in 2004 by the Indian Government. This was done as a genuine attempt toward finding a sustainable solution to the problem of providing adequate retirement pension income for every Indian. Also, the National Pension Scheme was initiated by the central government to get rid of the huge pension liabilities of future retirees in India.

Not many in the employee community favoured the removal of OPS. That is because the new system of NPS was dependent on market-linked returns and hence, offered no assurance of return or pension amount. The older OPS system on the other hand was more reliable and offered predictable pension income as it based the future monthly pension on the last drawn salary of the employee.

Also, the OPS pension was 100% tax-free in the hands of the pensioners. NPS follows a hybrid approach where 60% of the NPS corpus is available tax-free for lumpsum withdrawal while the remaining 40% has to be used to purchase an annuity which will generate a pension which is taxable. To know more, read about NPS taxation.

NPS vs OPS – Which is Better (2023)?

It would be clear by now that Old Pension Scheme is a pension-oriented scheme with most of the burden on the government. While National Pension Scheme is an investment-cum-pension scheme which is based on contributions from employees and hence, less of a burden for the government.

Though NPS offers the option to invest in equity and hence generate higher returns in the long term, OPS provides more predictability in the pensionable years of the retiree. This obviously is of high importance for someone who is about to retire. So in that respect, OPS was more beneficial and offered higher peace of mind to retirees.

But while NPS has a bit of uncertainty due to its market-linked structure, OPS has a higher fiscal cost for the government in the later years.

If you check the latest NPS vs OPS news, you will find that till now, almost all the state governments had joined NPS in addition to the central government and PSUs. Check the List of State Governments who have joined NPS here.

But now after several years, there is again some demand from various corners to bring back the OPS pension in India. In fact, one of the large states of India has actually decided to reinstate OPS in place of NPS. This is bound to have a huge fiscal implication for the government. If not now, then surely later on. But the central government continues to deny that it has any proposal to scrap the existing National Pension Scheme (NPS) and revert to the old pension scheme OPS. So chances of moving from NPS to OPS are very low.

Is NPS better than Old Pension Scheme?

In the long run, the contributions made to NPS when invested in equity instruments have the potential to create a large corpus (try this free NPS Corpus Pension Calculator). But this will still be dependent on market returns and will not have any guarantees like what OPS offered at a minimum starting pension of 50% of the last drawn salary.

So that was about the NPS OPS discussion here. Only time will tell whether the government decides to accept the difference between OPS and NPS as a big enough reason to restore OPS or continue with NPS itself. Though chances of NPS to OPS happening are very low from what can be inferred from the government’s latest view on OPS vs NPS.

I hope you now know the difference between NPS or OPS, i.e. between old and new pension schemes NPS vs OPS in India (2023).

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