16th September 2024 (9 Topics)
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National Pension System (NPS) and Unified Pension System (UPS)
Context
All central government employees retiring before April 1, 2025, can choose Unified Pension Scheme (UPS). Employees under National Pension Scheme (NPS) (post-April 1, 2004) have the option to switch to UPS. Once a decision is made to switch to UPS, it cannot be reversed.
What is National Pension Scheme?
- The traditional pension system in India was the Old Pension Scheme (OPS). Started in 1924 by the British government, it was relaunched by the Indian government post independence. The central government in 2004 introduced the National Pension System (NPS).
- The NPS, established in 2004 and expanded in 2009, was introduced as an alternative to the Old Pension Scheme. It is a contributory pension scheme designed to help individuals build a retirement fund through regular contributions.
- Eligibility: Open to all individuals aged 18 to 70 years.
- Objective: To help investors accumulate a retirement corpus through consistent contributions.
- Accounts:
- Tier I Account: Has a lock-in period of 15 years. Offers additional tax benefits of up to Rs 50,000 per year, beyond the Section 80C limit of Rs 1.5 lakh.
- Tier II Account: Functions like a savings account with no lock-in period.
- New Option: Starting April 1, 2025, central government employees will have the option to switch from the National Pension System (NPS) to the Unified Pension System (UPS) or continue with NPS.
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Old Pension Scheme (OPS) |
National Pension Scheme (NPS) |
Unified Pension Scheme (UPS) |
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Considerations for Employees
- For Younger Employees: NPS might be more advantageous due to its flexibility and mobility.
- For Tenured Employees: UPS offers more stability and guaranteed benefits, making it preferable for those closer to retirement.
Sustainability of Pension Schemes
- OPS was financially challenging for the government due to the lack of employee contributions.
- NPS puts the sustainability risk on the individual due to market-linked returns.
- UPS balances between defined benefit and contribution aspects. While it offers a guaranteed pension and inflation protection, it requires significant contributions from both employees and the government.
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