Roadmap for Answer Writing

1. Introduction
   • Briefly introduce the context of pension schemes in India.
   • State the significance of the New Pension Scheme (NPS) and Old Pension Scheme (OPS).
   • Mention that the NPS replaced the OPS in 2004 due to financial sustainability concerns.
2. Key Differences Between NPS and OPS
   • Nature of the Scheme:
     • NPS: Defined contribution scheme, where both employees and employers contribute to the fund.
     • OPS: Defined benefit scheme, where the government provides a fixed pension based on the last drawn salary.
   • Eligibility:
     • NPS: Available to all Indian citizens (18-65 years).
     • OPS: Only available to government employees.
   • Risk Involved:
     • NPS: Involves market-linked returns, so it carries investment risk.
     • OPS: No risk, as the pension is fixed and guaranteed.
   • Tax Benefits:
     • NPS: Contributions are tax-deductible under Sections 80C and 80CCD(1B) of the Income Tax Act.
     • OPS: No specific tax benefits for subscribers.
   • Pension Amount:
     • NPS: Provides market-linked returns and requires the remaining corpus to be invested in annuities.
     • OPS: Provides a fixed pension of 50% of the last drawn salary, with dearness relief.
3. Rationale Behind the Introduction of NPS (2004)
   • Growing Pension Liabilities:
     • The OPS led to an unsustainable increase in the pension bill, with the central government’s pension liabilities growing 58 times between 1991 and 2020-21.
   • Financial Burden on State Governments:
     • OPS placed significant pressure on state finances, such as in Himachal Pradesh, where pension costs amounted to 80% of the state’s tax revenues.
   • Encouraging Retirement Savings:
     • NPS aims to promote the habit of saving for retirement and reduce government liability.
   • Portability:
     • NPS allows employees to carry their pension benefits across different jobs and locations, providing flexibility and ease of administration.
4. Conclusion
   • Summarize the differences and reiterate the reasons behind the shift to the New Pension Scheme.
   • Mention how NPS attempts to create a more sustainable and financially secure retirement system for employees and the government.

Relevant Facts to Use in Your Answer

• NPS:
  • Defined contribution pension scheme where both employee and employer contribute (source: Government of India, NPS guidelines).
  • Tax-deductible investments up to ₹1.5 lakh under Section 80C and an additional ₹50,000 under Section 80CCD(1B) (source: Income Tax Act, 1961).
  • Market-linked returns based on employee’s investments (source: Pension Fund Regulatory and Development Authority).
• OPS:
  • Defined benefit pension scheme providing a fixed pension (50% of last drawn salary) (source: Government of India, OPS guidelines).
  • No tax benefits or contribution from employees (source: OPS guidelines).
• Rationale Behind NPS:
  • Government pension bill rose by 58 times between 1991 and 2020-21 (source: Reserve Bank of India).
  • Himachal Pradesh’s pension liability accounted for 80% of the state’s own tax revenues (source: State Finance Reports).
  • Introduction of NPS aimed at sustainability, reducing the financial burden of the OPS (source: OASIS report).