OPS vs. NPS: Understanding the Pros and Cons of Each Pension Scheme

The Indian government has recently introduced a new pension scheme for its employees called the Unified Pension Scheme (UPS). This scheme aims to address the opposition’s demand for reinstating the Old Pension Scheme (OPS) by incorporating several improvements over the New Pension Scheme (NPS). The UPS offers assured pensions, family pensions, and minimum pensions, among other features. But how does it compare to the OPS? Let’s explore the key differences and benefits.

What is the Unified Pension Scheme (UPS)?

The UPS provides an assured pension to government employees based on the average of their basic pay over the last 12 months of service. Employees who complete 25 years of service are entitled to this assured pension, which amounts to 50% of the average basic pay. For those who serve up to 10 years, the scheme guarantees a minimum pension of ₹10,000. Additionally, the family pension feature ensures that in the event of an employee’s death, their family will receive 60% of the pension.

Comparing OPS and UPS

To understand which scheme offers more benefits, it is essential to evaluate the following key aspects:

1. Employee Contribution: Under the UPS, employees are required to contribute 10% of their basic pay, similar to the NPS. The government, on the other hand, has increased its contribution from 14% to 18.5%. In contrast, the OPS did not require employees to contribute to their pension. The entire pension contribution was made by the government, with no deductions from employees’ salaries.

2. Pension Calculation: The OPS provided employees with a pension equal to 50% of their last drawn salary, which included both basic pay and dearness allowance. The UPS changes this calculation slightly. Instead of basing the pension on the final salary, it is calculated as 50% of the average basic pay over the last 12 months. This means that if an employee receives a promotion or salary increase close to retirement, the UPS will not factor in this higher final salary for pension calculation. Instead, it uses the average basic pay from the last year of service.

3. Tax Benefits: The tax benefits under the UPS have not been clearly outlined yet. However, in the NPS, 60% of the pension corpus withdrawn at retirement is tax-free, while the remaining 40% is subject to tax based on the individual’s salary bracket. The OPS did not have such provisions, as pensions were fully funded by the government and not subject to taxation.