Many government employees in India depend on pensions for a steady income after retirement. For a long time, government employees were covered under the Old Pension Scheme or the OPS for retirement pension. It was replaced with the National Pension Scheme in 2004. To meet the concerns raised with the existing pension schemes, the government introduced the Unified Pension Scheme or UPS.
While both, the OPS and the UPS, aim to support retired employees, they work in different ways. Let’s understand UPS vs OPS, and highlight the major differences between them in simple terms.
What is the UPS?
The Unified Pension aims to bring together the benefits of both old and new systems. Under the UPS, central government employees can enjoy a guaranteed pension, family pension and minimum pension. State employees can also avail of these benefits.
What is the OPS?
The Old Pension Scheme was in place before 2004 and offered a guaranteed pension to government employees. Its distinct feature was that it did not require employee contributions. However, it was phased out in favour of contribution-based systems.
Differences between the UPS and the OPS
Let’s understand the main points of difference between the UPS and the OPS:
1. Pension Calculation Method
One of the major differences between these two types of pension schemes lies in how the pension is calculated. In the OPS, the pension was fixed at 50% of the last-drawn basic salary, along with dearness allowance (DA). In contrast, under the UPS, it is based on the average basic salary of the last year and DA drawn in the year prior to the superannuation.
2. Employee Contribution Requirement
The old pension scheme did not require employees to contribute to their pension fund. However, under the UPS, employees must contribute 10% of their basic pay and DA, while the government contributes 18.5%.
3. Tax Benefits**
The OPS did not offer tax benefits for employee contributions (since there weren’t any). However, the taxation aspects of the UPS are yet to be announced by the government. If the UPS follows the NPS taxation model, it may earn an extra point for the UPS in the UPS vs OPS discussion, as NPS provides tax deductions under Section 80C.
4. Minimum Pension Guarantee
The Unified Pension Scheme has increased the guaranteed minimum pension amount to ₹10,000 per month for employees with a minimum of 10 years of service (compared to ₹9,000 under the OPS).
5. Lump-sum Payment Option
One of the key differences between the UPS and the OPS lies in the extent of lump-sum payout an employee can claim. In the OPS, pensioners could commute up to 40% of their pension into a lump sum. This also led to reduced pension amounts. UPS, on the other hand, offers a lump sum equal to one-tenth of the employee’s last-drawn monthly salary (along with DA for every six months of completed service). This is applicable without any reduction in the regular pension.
To sum up, the UPS offers more structured benefits and better long-term value. The OPS may have been simpler; however, it is not a viable retirement planning option for employees anymore. With support from the Unified Pension Scheme, India’s government workforce can plan better for retirement.
** Tax exemptions are as per applicable tax laws from time to time.
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