Old Pension Scheme vs NPS - Basic differences and which is better?

Old Pension Scheme vs NPS: Several states are reversing back to the old pension scheme. States like Rajasthan, Chhattisgarh and Jharkhand have already implemented the old pension scheme and discontinued the National Pension System (NPS). 

The old pension scheme was discontinued by the BJP-led NDA government in December 2003. The government had then launched the NPS as a substitute for the old pension scheme. The NPS took effect on April 1, 2004.

In general, both the old pension scheme and NPS are pension schemes. But the two are different from each other. While the old pension scheme is a pension-oriented scheme, the NPS is an investment cum pension scheme where a part of the money is invested in the market, thus generating more returns. The returns in NPS are not guaranteed and depend on the performance of the asset allocation by the subscriber based on his/her risk taking capability during the employment tenure.

Here we will tell you the differences between the old pension scheme and NPS

OLD PENSION SCHEME

1. The old pension scheme promises a fixed monthly income to government employees after retirement. 

2. It provided 50 per cent of the last drawn salary as a pension. 

3. No tax benefits are applicable to the employees. 

4. Income under the old pension scheme doesn't attract tax.

5. Only government employees are eligible for receiving a pension under the old pension scheme after retirement.

NPS

1. The NPS is also meant for government employees. However, private sector employees can also join NPS.

2. In NPS, employees contribute money from their salary during their employment tenure. The amount is invested in market-linked instruments.

3. Investment in NPS up to Rs 1.50 lakh is tax-deductible under Section 80C of the Income Tax Act, 1961. Additional annual investments up to Rs 50,000 are tax-deductible under Section 80CCD (1B) of the Act.

4. After retirement, an employee can withdraw a part of the pension amount in a lumpsum. s per the rule, 60 per cent of the corpus on maturity is tax-free, while the remaining 40 per cent is taxable and must be invested in annuities for a regular income or pension.

5. NPS is mandatorily applicable to Central government employees except armed forces recruited on or after January 1, 2004. State governments too follow the NPS for their employees. 

6. Under NPS, employees make a monthly contribution at the rate of 10 per of their salary. A matching contribution is also made by the government. Starting April 1, 2019, the employer’s contribution rate has been enhanced to 14 per cent for the central government employees.

7. All citizens between 18 and 65 years are eligible for NPS.

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