Old Pension Scheme vs National Pension Scheme

Old Pension Scheme vs National Pension Scheme

Subject :Economy

Context: 

There is no provision under Pension Fund Regulatory and Development Authority Act, 2013 and other relevant Regulations to return deposits under the National Pension System (NPS) back to the respective State governments.

Old Pension Scheme vs National Pension Scheme:

• OPS – discontinued on April 1, 2004 – pension constituted 50 per cent of the last drawn salary of an employee.
• This entire amount was paid by the government.
• It was replaced by the national pension scheme (NPS) or contributory pension scheme for employees who joined on or after April 1, 2004.
• It is regulated under the PFRDA (The Pension Fund Regulatory & Development Authority) Act, 2013.
• NPS is being implemented and regulated by PFRDA in the country.
• National Pension System Trust (NPST) established by PFRDA is the registered owner of all assets under NPS.
• Under it every government employee is allotted a Permanent Retirement Account Number, and has to mandatorily contribute 10% of pay and dearness allowance to the pension fund, which is matched by the government.
  • After the latest amendment, in 2019, the government share of the contribution has been raised to 14% from 10%.
  • This money can then be invested by fund managers.
• On retirement, the employee can withdraw 60% of the corpus but is required to invest at least 40% to purchase an annuity from an insurance firm regulated and registered by government authorities. The interest on the annuity is to be provided as a monthly pension to the employee.
• The Centre left it to states to adopt the new system, and the States have the power to roll it back.
• NPS is structured into two tiers:
  • Tier-I account: This is the non-withdrawable permanent retirement account into which the accumulations are deposited and invested as per the option of the subscriber.
  • Tier-II account: This is a voluntary withdrawable account which is allowed only when there is an active Tier I account in the name of the subscriber.

Beneficiaries:

• NPS was made available to all Citizens of India from May 2009.
• Any individual citizen of India (both resident and Non-resident) in the age group of 18-65 years can join NPS.
• However, OCI (Overseas Citizens of India) and PIO (Person of Indian Origin) card holders and Hindu Undivided Family (HUFs) are not eligible for opening of NPS accounts.

The differences:

• The basic difference is that the NPS is a contribution-based pension system unlike the OPS where the entire amount was paid by the government.
• In case of OPS benefit due was defined before– 50 per cent of the last drawn salary of an employee while the NPS, the pension benefit is determined by factors such as the amount of contribution made, the age of joining, type of investment, and the income drawn from that investment.
  • The minimum payment to retired employees as pension is ₹3,500 in the NPS.
• NPS provides a pension fund on retirement which is 60 per cent tax-free on redemption while the rest needs to be invested in annuity which is fully taxable while the Income from OPS is not taxed.