OPS vs NPS vs UPS: India's pension puzzle explained

NPS vs UPS: Following criticism over scrapping the Old Pension Scheme, the Narendra Modi-led government has brought in a Unified Pension Scheme that aims to blend the benefits of OPS with features from NPS.

The NPS was launched by the Atal Bihari Vajpayee administration to address the single major flaw of the OPS, its lack of funding. The latter encourages better sustainability in the pension system by allowing the contribution to be a lot more individualistic in nature.

"The UPS aims to combine the best elements of the OPS and NPS. It offers the security of a fixed pension and inflation adjustments from the OPS, while also incorporating the contributory nature of the NPS for a potentially higher pension payout," said Arpit Suri, CA and personal finance expert.

Unified Pension Scheme (UPS)

The UPS is going to be implemented in FY2025-26.It aims to address the grievances of government employees who are dissatisfied with the National Pension Scheme.

Unlike NPS, which was a non-defined benefit system, in UPS the guaranteed pension is 50 per cent of the average of basic pay drawn during the last 12 months before retirement.

It also allows for a reduction in the number of years of service, with the minimum sufficient number being 10 to get this provision. The UPS also covers family pensions, where 60 per cent of the employee's basic pay is granted to the family in the event of the employee's death.

A minimum guaranteed pension of Rs 10,000 per month has also been agreed upon for employee service life of at least 10 years. Indexation in the UPS assured pensions, family pensions, and minimum pensions is intended to hedge against inflation and link such pensions to an increase in cost of living.

At retirement, employees are entitled to a gratuity payment of 1/10th of the monthly emolument, which includes pay and dearness allowance, for every six months of service, besides their pension.

This scheme also assures family security, through the provision of 60 per cent of the pension to the employee's family in the event of the latter's death, and it assures a minimum pension for those with adequate years of service. Unlike the Andhra Pradesh government's proposed Guaranteed Pension Scheme, which promised only 33 per cent of the last drawn salary, UPS offers a far superior and broader pension package.

National Pension System (NPS)

The National Pension System, initiated in January 2004 for government employees and extended to all sectors in the year 2009, is a voluntary long-term retirement investment scheme governed and regulated by the Pension Fund Regulatory and Development Authority.

NPS introduces the possibility of much higher growth in investment and also flexibility in withdrawing funds, wherein on retirement, the subscriber can withdraw a maximum of 60 per cent of the accumulated savings as tax-free and the balance 40 per cent is required to be compulsorily utilised for purchasing an annuity.

It has two tiers, tier I, wherein withdrawals are restricted to retirement, and tier II, which offers more flexibility in accessing the funds. Besides that, the NPS offers tax benefits under Sec 80 CCD of the Income Tax Act through deductions up to Rs 1.5 lakh, which makes the scheme a good avenue for retirement planning.

Old Pension Scheme (OPS)

Under the Old Pension Scheme, government servants were granted a pension that was equal to 50 per cent of the last drawn basic pay, while a DA added to it provided for the inflationary rise. The entire scheme was contributed by the government. The OPS also included a gratuity of up to Rs 20 lakh and continued pensions of retirees to their dependents. As for the pensions provided under the OPS, these were a charge upon the treasuries, where no amount was deducted from the salaries of employees as contributions towards the pension.