Pension system: Difference between Old Pension Scheme and New Pension Scheme


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Updated on Mar 17, 2023

One of the upsides of working in the government sector is that you get a pension after retirement. This pension continues till the time you are alive. As we talk of pensions, we must know the difference between Old Pension Scheme and New Pension Scheme. Let us first start with each of their concepts.

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What is Old Pension Scheme?

The pension scheme in India was introduced in 1950 and has always applied only to government employees in the country. Under the OPS Old Pension Scheme, government employees receive 50% of their last drawn basic salary. They also get Dearness Allowance. This is all provided to them once they are retired. This scheme comes with a guaranteed income. However, an employee has to work for at least 10 years to avail of this scheme.

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What is New Pension Scheme?

The New Pension Scheme, also called NPS, was introduced in 2003 by the National Democratic Alliance (NDA) government. However, it came into effect in 2004. The New Pension Scheme is available for both employees of the government as well as private sectors. Under this scheme, the employees make a contribution of 10% of their basic salary, and 14% is contributed by the employers.

Employees working in the private sector can also participate in the New Pension Scheme. When you contribute to this scheme, you get more freedom and control of your future. You will be able to benefit from the returns that are linked to the market. In addition to this, 60% of the benefit that you get on maturity is free of taxes. The remaining 40% can be invested in annuities which are 100% taxable.

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5 Major Differences between Old Pension Scheme and New Pension Scheme

As per the Old Pension Scheme’s latest news, Chattisgarh and Rajasthan are the two states that came with the announcement of the reversion of the Old Pension Scheme instead of the New Pension Scheme. The reason is that the New Pension Scheme is uncertain, while the Old Pension Scheme comes with a higher financial cost.

While the states are trying to get the Old Pension Scheme for the employees, let us first discuss the difference between these two concepts. So, here are some of them.

1. Tax benefits:

According to the Old Pension Scheme, the pension amount is tax-free. However, as per the New Pension Scheme, 60% of the amount is free of taxes, and the rest of the 40% is taxable if it is invested in annuities.

2. Return certainty:

The Old Pension Scheme comes with the certainty of return. It is based on the monthly pension on the last salary that the employee was receiving. The New Pension Scheme comes with market-linked returns and has no guarantee.

3. Contributions:

Under the Old Pension Scheme, the monthly payments are almost equivalent to 50% of the salary that employees drew the last time before their retirement. In the New Pension Scheme, the employees contribute 10% of their salaries, and 14% is contributed by the employers.

4. Eligibility:

As the eligibility is concerned, only individuals working in the government sector can receive a pension under the Old Pension Scheme, once they retire from their service. In the New Pension Scheme, any Indian citizen between the age group of 18 years and 65 years can avail of the benefits of this scheme.

5. Flexibility:

In the Old Pension Scheme, there was not much flexibility and the monthly income was fixed. It is not the same in the case of the New Pension Scheme. You will have more freedom and can control your finances. You can have the choice of choosing your asset allocation, and it enables you in generating higher returns as well as creating a huge retirement corpus.

As we discuss the two types of pension schemes in India, they both come with their own sets of pros and cons. Therefore, before choosing the ones that suit your needs, you first need to compare both of them thoroughly and then make up your mind.

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FAQs: Pension system: The old versus the new

Who is eligible for Old Pension Scheme?

Government employees were eligible for OLD Pension Scheme.

Which states have Old Pension Scheme in India?

The Indian states that have Old Pension Scheme are Rajasthan, Chattisgarh, Punjab, Himachal Pradesh, and Jharkhand.

When did the Government of India stop pensions?

The Government of India stopped pensions after 2003.

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Mar 14, 2023
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PayBima is an Indian insurance aggregator on a mission to make insurance simple for people. PayBima is the Digital arm of the already established and trusted Mahindra Insurance Brokers Ltd., a reputed name in the insurance broking industry with 17 years of experience. PayBima promises you the easy-to-access online platform to buy insurance policies, and also extend their unrelented assistance with all your policy related queries and services.

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