How is NPS better than the Old Pension Scheme?

The OPS provides a fixed amount of pension every month for government employees. They also get the benefit of increases in DA twice a year. For example, if a government employee’s basic monthly salary plus DA at the time of retirement is Rs.10,000, he would be assured of a pension of Rs.5,000 every month. Additionally, the monthly pension increases when the DA increases. If there is an increase of 4% in DA, the monthly pension will increase to Rs.5,200 (An increase of 4% is calculated upon the pension amount, i.e. Rs.5,000).

However, under the NPS, the pension amount is determined by various factors, such as the amount of contribution, age of joining, type of investment and the income drawn from the investment.

For example, if an employee is 35 and the retirement age is 60, the total investing period will be 25 years. When his basic salary and DA is Rs.10,000, the monthly contribution towards NPS will be Rs.2,400 (10% employee contribution on Rs.10,000, i.e. Rs.1,000 + 14% government contribution on 10,000, i.e. 1,400).

When the employee becomes 60 years, he will receive a monthly pension of Rs.4,595 when he invests 40% of the accumulated contributions in annuities. He will get the 60% of the accumulated contributions as a lump sum, i.e. Rs.13,78,607. Thus, he will get a monthly pension and a lump sum, which he can re-invest. When he invests 60% of the accumulated contributions in annuities, he will get a monthly pension of Rs.6,893 and get Rs.9,19,071 as a lump sum.

Via ClearTax