Old Pension Scheme vs National Pension System – Fundamental Differences and Which is Better?


Old pension plan vs NPS: Several states are reverting to the old pension system. States like Rajasthan, Chhattisgarh and Jharkhand have already introduced the old pension scheme and abolished the National Pension System (NPS).

The old pension scheme was abolished by the BJP-led NDA government in December 2003. The government then launched the NPS as a replacement for the old pension scheme. The NPS came into effect on April 1, 2004.

In general, the old pension plan and the NPS are pension plans. But both are different from each other. While the old pension scheme is a pension-focused scheme, the NPS is an investment and retirement scheme in which part of the money is invested in the market, thereby generating more returns. NPS returns are not guaranteed and depend on the performance of the underwriter’s asset allocation based on their ability to take risk during their tenure.

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

OLD PENSION SCHEME

1. The old pension plan promised a fixed monthly income to government employees after retirement.

2. She paid 50% of the last salary received in the form of a pension.

3. No tax benefit is applicable to employees.

4. Earnings from the old pension plan are not taxable.

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

NPS

1. The NPS is also aimed at civil servants. However, private sector employees can also join the NPS.

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

3. Investments in NPS up to Rs 1.50 lakh are 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 part of the pension amount in a lump sum. According to the rule, 60% of the capital at maturity is tax exempt, while the remaining 40% is taxable and must be invested in annuities for regular income or a pension.

5. The NPS is mandatory for central government employees, except for armed forces recruited on or after January 1, 2004. State governments also follow the NPS for their employees.

6. Under the NPS, employees pay a monthly contribution at the rate of 10% of their salary. A counterpart contribution is also paid by the government. Since April 1, 2019, the employer’s contribution rate has been increased to 14% for employees of the central administration.

seven. All citizens between the ages of 18 and 65 are eligible for the NPS.

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