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UPS vs NPS vs OPS: Comprehensive Guide to Pension Schemes

Pension schemes are a vital part of a country's economy, reflecting gratitude to seniors for their years of service. These plans ensure financial security in retirement, acknowledge the contributions made by individuals throughout their working lives, and play a crucial role in sustaining economic stability.

With various pension schemes available choosing one can be overwhelming. Worry not, we have for you a comprehensive guide to pension schemes. A detailed analysis of UPS vs NPS vs OPS will help you decide which one would be most suitable for you.

Introduction to Pension Schemes: UPS, NPS, and OPS

The Indian government has also been quite sensitive to the pensioners. It is estimated that in the financial year 2024, central and state governments together spent about ₹9.6 trillion on employee pensions. Recently the NDA government introduced the Unified Pension Scheme. Along with the other prevalent schemes, the introduction of this new scheme has evoked different reactions from different sectors.

The three prominent pension schemes in the country today are:

  1. Unified Pension Scheme
    The Unified Pension Scheme is a very recent addition by the Prime Minister Narendra Modi-led government. This new pension scheme will come into being from FY2025-26.
     
  2. National Pension System
    National Pension System, better known as the NPS, was introduced in the year 2004. The scheme was earlier only for government employees but was then extended to all sectors in 2009. 

  3. Old Pension Scheme
    As the name suggests, the Old Pension Scheme is the oldest scheme out of the three. Under this scheme, government employees having put in a minimum of 10 years of service, receive a pension.

Read on as we discuss UPS vs NPS vs OPS in detail.

What is UPS (Unified Pension Scheme) pension? 

Let us begin with the Unified Pension Scheme.

Overview and Key Features

In the history of pension schemes, UPS is the latest addition. UPS is a pension scheme, however, here an employee has to contribute 10% of their basic pay and the DA (dearness allowance). The government’s share will be 18.5%, which stands at 14% for NPS. 

Eligibility Criteria

As per the information received, employees who have put in 25 years of service will receive a pension that equals 50% (half) of the average salary in the last 1 year/ 12 months.

Benefits and Drawbacks

The benefits of the UPS are listed below:

The policy is said to offer 5 key benefits:

  • Assured Pension
  • Assured Family Pension
  • Assured Minimum Pension
  • Inflation Indexation
  • Gratuity

The scheme has been designed to provide adequate financial security to the employees and their families.

However, keep in mind that the taxation details are still awaited. Also, many consider the Unified Pension System to be worse than the National Pension System. People consider that even after contributing 10% of the basic pay for the whole service period, pensioners will not receive a lump sum. Many consider that the new pension scheme does not offer the required financial stability.

What is an NPS (National Pension System) pension? 

Now, let us get into the National Pension Scheme details.

Overview and Key Features

The launch of the NPS in 2004, transformed the existing pension system, which is currently known as the Old Pension Scheme. Under the PFRDA, Pension Fund Regulatory and Development Authority, NPS is a voluntary investment program that offers pension post-retirement. Here, government employees contribute 10% of their basic salary plus DA, while the government contributes 14%.

Eligibility Criteria

The ​​National Pension Scheme was extended to all sectors in the year 2009 except armed forces. 

Benefits and Drawbacks

The benefits of NPS are as follows:

  • NPS is a market-linked annuity scheme. Here, during your employment, you keep investing an amount and at the time of retirement (60 years), you can withdraw 60% of the corpus, that too tax-free.
  • The remaining 40% is utilised as a monthly annuity.
  • NPS allows flexibility and lets you have control over your investments. You can choose a fund manager that appeals most to you.
  • NPS contributions offer tax benefits under section 80C, 80 CCD (1B) and 80 CCD2.
  • However, keep in mind that:

  • The payout of NPS is not fixed as it is a market-linked instrument.

Additional Read: How Indian Women Can Benefit from Government Schemes

What is an OPS (Old Pension Scheme) pension? 

We will now discuss the Old Pension Scheme.

Overview and Key Features

This government-approved pension scheme for government employees offers a guaranteed monthly pension to those who have put in a minimum of 10 years of service. Assured pensions amount equal to 50% of the average basic pay over the previous 12 months before retirement for employees with at least 25 years of service.

Eligibility Criteria

OPS is for:Central government employees appointed before the NPS notification date which is 22 December 2003.

Benefits and Drawbacks

The benefits of OPS are as follows:

  • The is no deduction from the employee's income while they are in service.
  • There is a pension revision twice a year.
  • Employees and their spouses get the pension benefit.

But at the same time, know that:

  • Pensioners do not receive any corpus at the time of retirement.
  • OPS puts a big burden on the central and state governments.
  • Pension liabilities keep growing year after year.

UPS vs NPS vs OPS: Key Differences    

Particulars

UPS

NPS

OPS

Nature

Government-backed pension benefits

Market-linked pension scheme

Defined-benefit pension plan

Contributions

No individual contributions; funded by government

Employees contribute 10% of salary; government contributes up to 14%

No direct contribution from employees; fully government-funded

Returns

Fixed pension amount, not market-dependent

Returns depend on market performance

Fixed pension amount, linked to last drawn salary

Tax Benefits

No direct tax benefits for employees

Tax deductions under Section 80CCD

No tax benefits on pension received

Withdrawal

Pension paid for lifetime, with certain conditions

Partial withdrawal allowed; lump sum on retirement

Full pension benefits without market dependency

Risk Factor

Low risk, as it is government-backed

Market-dependent risk

No risk, as it is state-funded

Which is better for you - NPS, UPS or OPS?

Each pension scheme operates under different structures, offering varying benefits depending on employment status, risk tolerance, and financial goals.

  1. Understanding the structure of each scheme
    The National Pension System (NPS) is a market-linked retirement plan where contributions are invested in various assets. The Old Pension Scheme (OPS) provides a fixed pension amount without requiring employee contributions. The Unfunded Pension Scheme (UPS) is also government-backed but may not require direct employee participation.

  2. Risk factors and returns
    The primary difference between NPS vs OPS is the risk element. While OPS provides assured returns, NPS investments fluctuate based on market performance. UPS, in some cases, is dependent on government allocations and budget provisions.

  3. Taxation and withdrawal rules
    NPS provides tax benefits under Section 80CCD, whereas OPS does not offer specific tax deductions on pension payouts. NPS also allows for partial withdrawals, while OPS follows a fixed pension structure based on the last drawn salary.

  4. Suitability based on employment type
    Government employees may have access to both OPS and NPS, depending on their recruitment policies. Private-sector employees primarily rely on NPS or other retirement schemes since OPS is not available to them.
  5. Retirement security and long-term benefits
    OPS guarantees post-retirement income stability but is available only to select government employees. NPS, on the other hand, provides flexible investment options with potential for higher returns, but it carries market-linked risks.

Conclusion: Making an Informed Decision  

In conclusion, selecting the right pension scheme hinges on your financial priorities and risk appetite. While the OPS guarantees an inflation-linked pension, the NPS provides the opportunity to build a potentially larger retirement corpus. A new concept still to be launched, the UPS is expected to offer a balanced approach with both security and growth potential, ideal for those seeking a middle ground.

NPS is best suited for those willing to take on market risks for the chance of a larger retirement corpus. OPS, with its guaranteed, inflation-linked pension, might be perfect for those who prioritise stability and predictability. Carefully assess your needs to choose the scheme that best fits your retirement goals so that you can make an informed decision.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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Frequently Asked Questions

How should private sector employees view NPS?

Answer Field

Employees in the private sector can also opt for NPS. They have the option to go for 14% of their basic salary toward NPS. Under the new tax regime, you can get income tax deductions. 

Can you switch between UPS, NPS, and OPS?

Answer Field

The UPS is announced to be effective from 1 April 2025, and you will have the option of switching. However, once you opt for UPS, you cannot switch back to NPS.

How do contribution limits differ among UPS, NPS, and OPS?

Answer Field

Under the National Pension System, employees contribute 10% and the government makes a 14% contribution. Under the OPS, the employee did not contribute at all. Under UPS it is expected that employee will contribute 10% of their basic pay and the DA while the government’s share will be 18.5%.

What are the tax benefits associated with UPS, NPS, and OPS?

Answer Field

NPS offers tax benefits of 1.5 lakhs under Section 80CCD, Rs 50,000 available under Section 80CCD (1B). Tax exemptions under the UPS are not yet announced. As in the OPS, the employees do not contribute, there aren’t any tax benefits.

How do market conditions affect NPS returns compared to OPS?

Answer Field

OPS is a guaranteed pension scheme, with the pension fixed. In the case of the National Pension Scheme, there is potential for a larger corpus due to market-linked investments.

What is the impact of early withdrawal on each pension scheme?

Answer Field

○        A premature withdrawal can be made after 5 years from the NPS account opening

○        There are specific reasons under which only a withdrawal can be made

What is the definition & full form of UPS pension?

Answer Field

UPS stands for Unified Pension Scheme. It is a recent initiative introduced by the government under Prime Minister Narendra Modi and is set to take effect in FY2025-26.

What is the definition & full form of OPS pension?

Answer Field

OPS stands for Old Pension Scheme. Under this scheme, government employees who have completed at least 10 years of service are eligible to receive a pension.

What is the definition & full form of NPS pension?

Answer Field

The National Pension System, commonly known as NPS, was launched in 2004. Initially designed for government employees, it was expanded in 2009 to include all sectors.

Which is better, UPS or NPS?

Answer Field

Choosing between UPS and NPS depends on your financial goals. UPS offers a balance of security and growth, while NPS provides higher growth potential but involves market risks.

Which is better, UPS or OPS?

Answer Field

The choice between UPS and OPS depends on your priorities. UPS offers a mix of security and market-linked growth, while OPS provides guaranteed, inflation-linked pensions, offering more stability but less growth potential.

The Old Pension Scheme vs NPS which is better?

Answer Field

The Old Pension Scheme (OPS) offers guaranteed income in retirement. The National Pension System (NPS), on the other hand, is market-linked, with the potential for a larger retirement corpus but comes with investment risks. OPS is better for those prioritising security, while NPS suits those comfortable with market fluctuations and seeking potentially higher returns.

What is the difference between OPS and NPS?

Answer Field

OPS is a defined-benefit pension scheme that provides a fixed pension based on the employee’s last drawn salary, while NPS is a market-linked pension plan where returns depend on investment performance. OPS does not require contributions from employees, whereas NPS mandates employee and employer contributions.

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