Understanding OPS vs NPS: Full Form, Eligibility, Calculations, and Tax Benefits
Last Updated : July 12, 2023, 1:40 p.m.
When planning to retire, it is essential to grasp the difference between the OPS and NPS. OPS full form is Old Pension Scheme, and NP full form is New Pension Scheme. These schemes govern the arrangement and delivery of pensions to retired employees. The Old Pension Scheme is the traditional method where the pension amount is predetermined based on factors such as years of service and salary.
Conversely, the New Pension Scheme is a current system where employees and employers contribute towards an individual’s pension account, and the ultimate pension amount relies on investment performance. Here, we will discuss OPS vs NPS and explain their differences.
OPS vs NPS: Explaining the Basics
Before proceeding further, knowing what OPS and NPS mean is essential. Let’s look at a brief explanation of OPS & NPS.
Old Pension Scheme (OPS)
As you know, the OPS full form is Old Pension Scheme. OPS is designed for government employees and guarantees a monthly pension based on their final salary and years of service. One noteworthy aspect of the Old Pension Scheme, OPS full form, is the Dearness Allowance (DA), which is applied twice a year to account for changes in the cost of living. It implies that when the Dearness Allowance increases, the pension amount also increases, providing additional financial assistance to government employees.
Employees are not subject to any salary deductions during their tenure, and after retirement, they can rely on a stable pension income under the Old Pension Scheme (OPS full form). It’s important to remember that this scheme is exclusively for government employees and differs from pension plans available in other industries.
New Pension Scheme (NPS)
Since we’ve seen the OPS full form, we will also know the full form of NPS. The full form of NPS is New Pension Scheme. In 2009, NPS was broadened to include all citizens, including those who are self-employed and those who work in unorganized sectors. It is a voluntary pension scheme where individuals contribute a fixed amount each month until they reach the age of 60 and receive a pension after they retire.
Government employees participating in NPS fund 10% of their basic salary and Dearness Allowance (DA), while the government contributes 14% of the basic salary and DA. For other citizens, the minimum monthly contribution to NPS is ₹500. NPS operates as a market-linked annuity scheme, where individuals invest regularly during their employment years, and their contributions are combined into a pension. This fund invests in government bonds, bills, and corporate shares to generate returns.
Professional wealth managers manage NPS investments, such as LIC, SBI, UTI, and others regulated by the Pension Fund Regulatory and Development Authority (PFRDA). Upon retirement, people can draw up to 60% of their NPS money and choose to invest 40% with any of the 10 professional wealth managers. It enables them to receive regular pension annuities as a monthly pension.
OPS vs NPS: Differences
As you know, OPS full form is Old Pension Scheme, and the NPS full form is New Pension Scheme. Let’s discuss the differences between OPS and NPS.
Pension Amount
OPS
Two factors in the Old Pension Scheme (OPS full form) determine the pension amount. It is either 50% of the final salary received with the added Dearness Allowance (DA) or the average income during the final 10 months of employment, whichever is higher. It ensures that government servants receive a reasonable pension reflecting their salary and service years.
NPS
The pension sum operates differently under the New Pension Scheme (NPS). After retirement, people can draw 60% of their NPS savings as a lump sum. It provides them with a significant portion of their accumulated savings. The remaining 40% is then invested in annuities, financial products that provide a regular pension income.
Individuals can secure a steady income stream throughout their retirement years by converting a portion of their NPS savings into annuities.
Contribution Amount
OPS
Employees do not give any amount towards their pension in OPS. The government funds the entire pension sum, ensuring public servants receive retirement benefits without additional financial burdens.
NPS
In NPS, government employees give 10% of their salary, including the basic and dearness allowance. The government also contributes 14% towards the employee’s NPS account. This combined contribution from the employee and the government helps build a substantial retirement corpus over time, providing individuals with a reliable source of income during their post-retirement years.
Tax Benefits
OPS
There are no specific tax benefits linked with the Old Pension Scheme. The pension amount obtained under OPS is generally subject to taxation according to the relevant income tax rules and regulations.
NPS
One of the benefits of participating in NPS is the availability of income tax advantages. Individuals contributing to NPS can claim tax deductions of up to ₹1.5 lakhs under Section 80C of the IT Act. It enables individuals to decrease their taxable income by the amount invested in NPS, resulting in potential tax savings.
Furthermore, individuals can claim an additional deduction of up to ₹50,000 on their NPS contributions under Section 80CCD (1b). These tax advantages make NPS an appealing option for individuals seeking to save for retirement while enjoying tax benefits.
Tax on Retirement Amount
OPS
The pension amount obtained under OPS is generally exempt from tax. It implies that government employees can receive their pension income without any deductions or tax obligations, providing them with financial security during retirement.
NPS
In NPS, the tax treatment of the pension amount varies. When individuals withdraw 60% of their NPS corpus as a lump sum after retirement, this portion is exempt from tax. However, the remaining 40% invested in annuities is subject to taxation.
The annuity income is considered regular and taxed according to the individual’s applicable income tax slab. It’s important to consider the tax implications on the annuity income while planning for retirement under NPS.
Conclusion
In conclusion, the difference between the Old Pension Scheme (OPS full form) and the New Pension Scheme lies in the eligibility, the basis of pension payment, calculation of retirement amount, contribution sum, income tax benefits, and tax implications on the pension amount. These fluctuations make NPS more flexible and provide potential tax benefits and investment prospects compared to OPS, which is solely for government servants.