Old vs New Pension Scheme: Employees Free To Choose, But What’s The Difference?

NEW DELHI | Updated: 30 October, 2022 1:14 pm IST

After Punjab, Rajasthan and Chhattisgarh, now Central Govt allows certain employees to choose between the New Pension Scheme or Old Pension Scheme. Center said that under the Central Civil Services (Implementation of National Pension System) Rules, 2021, the option for the old pension scheme is available in case of the employee’s discharge from service on account of invalidation or disablement.

“Rule 10 of these rules [Central Civil Services (Implementation of National Pension System ) Rules, 2021] deals with option to be exercised by every Central Government employee covered under National Pension System for availing benefits under National Pension System or old pension scheme in the event of death of government servant during service or his discharge on the ground of invalidation or disablement,” the Department of Pension and Pensioners’ Welfare (DoPPW) has said in its office memorandum.

The Department of Pension and Pensioners’ Welfare (DoPPW) on October 26 said in an Office Memorandum (OM) that Central Civil Services (Implementation of National Pension System) Rules, 2021 have been notified to govern service-related matters of Central Government civil employees covered under National Pension System.

What is Pension?:

Pension is a fixed amount of money which is paid regularly to retired employees by the employer/organisation/Government. In total there are two types of pension schemes in India, Old Pension Scheme and New Pension Scheme.

Old Pension Scheme (OPS) vs New Pension Scheme (NPS)

The NPS is applicable to all employees joining services of the central government, including central autonomous bodies (except Armed Forces) on or after January 1, 2004. Whereas employees recruited before January 1, 2004 are eligible for OPS. Many state governments have also adopted NPS architecture and implemented NPS mandatorily for their employees joining on or after a cut-off date.

The Old Pension Scheme of the government is referred to as the Defined Benefit Pension System (DBPS). OPS is based on the last pay drawn by the employee; employees could withdraw 50 per cent of the last-drawn salary as pension after retirement. Whereas New Pension Scheme is referred as the Defined Contribution Pension System (DCPS), in which both the employer and employee contribute to build a corpus fund. The fund at the time of retirement is payable to employees in two different ways like by the way of annuity (pension)/lump sum withdrawal as per norms. A person is allowed to withdraw 60 per cent lump sum value of total corpus fund, that is also tax free. An NPS employee must buy an annuity (pension) of minimum 40 per cent of the total fund, that could currently provide a person 35 percent of their last withdrawn salary.

In the case of premature exit under the NPS, at least 80 per cent of the corpus fund of the employee has to be utilised to buy an annuity providing the monthly pension to employee and the remaining balance is paid as a lump sum to the employee.

Under the NPS, employees can also continue to contribute to the NPS beyond his/ her retirement, up to 70 years of age, and avail additional tax benefit on the contribution.

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