Demand for restoring the Old Pension Scheme:
Many states are trying to restore Old Pension Scheme and discontinue the National Pension System (NPS).
What is the Defined Pension Benefit Scheme (old)?
- The scheme assures life-long income, post-retirement.
- Usually the assured amount is equivalent to 50% of the last drawn salary.
- The Government bears the expenditure incurred on the pension.
- The scheme was discontinued in 2004.
What is the National Pension System (NPS)?
- The scheme is applicable to all new recruits joining the Central Government service (except armed forces) from April 1, 2004.
- On the introduction of NPS, the Central Civil Services (Pension) Rules, 1972 was amended.
- It is a scheme, where employees contribute to their pension corpus from their salaries, with matching contributions from the government.
- The funds are invested in earmarked investment schemes through Pension Fund Managers.
- At retirement, they can withdraw 60% of the corpus, which is tax-free and the remaining 40% is invested in annuities, which is taxed.
- It can have two components — Tier I and II.
- Tier-II is a voluntary savings account that offers flexibility in terms of withdrawal, and one can withdraw at any point of time, unlike Tier I account.
- Private individuals can opt for the scheme.
In 2019, the Finance Ministry said that Central government employees have the option of selecting the Pension Funds (PFs) and Investment Pattern in their Tier-I account.
Why in news now?
- In Feb, Rajasthan CM announced restoration of the old pension scheme for the government employees, who joined the service on or after January 1, 2004.
- The announcement meant that the National Pension System (NPS) would be discontinued in the State.
- The center had maintained that restoration of the old system would cause an unnecessary financial burden on the government.
Cons of NPS
- Forfeiture of pension: The NPS scheme was created by the Government of India, in order to stop all the defined pension related benefits that it gave to its employees.
- NPS restricts all kinds of withdrawals, before the subscriber reaches the age of 60 years.
- No tax benefits: The NPS corpus, which the subscriber can use for buying annuity or for drawing pensions, is taxable, when the schemes matures.
- Limit on investment: The subscriber cannot invest more than 50% of his or her total investment in the NPS account, towards the equities.
- No guarantee: While NPS is a government scheme, the corpus is created according to the returns, which are generated under the corporate bonds, government securities, and the equity.
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