NPS, UPS or OPS: Which’s the best Indian pension plan for Non-Resident Indians?

A pension plan is essential for a stable and peaceful future. Life without a steady income can be challenging after retirement. That’s when the pension funds come in handy.

Non-Resident Indians can invest in some pension funds in India. Several private operators like Bajaj Allianz, Kotak Life, ABSLI and Tata AIA offer attractive schemes. The Life Insurance Corporation of India also runs programmes that suit the NRIs.

Here’s a look at three government-sponsored pension funds in India: the National Pension Scheme, the Old Pension Scheme and the Unified Pension Scheme.

What’s the National Pension Scheme?

The National Pension Scheme (NPS), launched in January 2004 for government employees, is government-sponsored. In 2009, the scheme was opened to everybody, including non-resident Indians.

When employed, a subscriber can contribute regularly to a pension account and withdraw a part of the corpus, while the remaining corpus is used to buy an annuity that will provide a regular income after retirement.

It replaces the Defined Benefit Pension. The contributions are consolidated into a pension fund, which invests in a diversified portfolio of government bills, bonds, corporate shares, and debentures.

What are the features of NPS?

■ A voluntary scheme administered by the Pension Fund Regulatory and Development Authority (PFRDA), it’s considered a safe investment option.

■ It is open to all employees, except the armed forces, who joined the central government on or after January 1, 2004. Also available for private-sector employees and Non-Resident Indians.

■ Central government employees contribute 10% of basic salary, while the government contributes 14%. Other citizens can contribute at least Rs500 every month towards the pension fund.

■ The pension amount is not fixed as it is linked to market movements.

■ Family pension depends on the corpus and the chosen annuity plan at retirement.

■ Employees can withdraw 60% of the corpus upon retirement, which is tax-free. After ten years of opening the account, they can also withdraw a certain amount. Three withdrawals are allowed till they reach the age of 60.

■ Employees can choose a professional fund manager.

■ Tax breaks for NPS contributions.

■ It’s ideal for people without sound financial knowledge as professionals manage the fund.

Why is NPS an attractive option?

The NPS cover has been extended for all citizens, including self-employed and unorganised workers, in 2009. Citizens can contribute an amount every month until the age of 60 and receive a pension after retirement.

Can Non-Resident Indians invest in NPS?

Non-Resident Indians can invest in NPS and receive benefits, including tax breaks. NRIs can have both an NPS Tier 1 and Tier 2 account, if they have a PAN card, a bank account and are between 18-60 years old.

What are the NPS benefits for NRIs?

Low cost: An NPS account can be opened with a minimum initial contribution of Rs500 for Tier I (mandatory) and Rs1,000 for Tier II (optional). There are no lower or upper limits on the number of annual contributions. The fund management charges are also low.

High returns: The market-linked returns help beat inflation and create a good corpus over time.

Tax benefits: NRIs can get tax deductions on NPS contributions. Up to 40% of your corpus withdrawn at maturity is tax-free.

Flexibility: NRIs can choose the fund manager, investment option, and asset allocation. Fund managers and investment options can be changed once a year. There’s also a provision to make partial withdrawals after three years of investment, and each withdrawal shouldn’t exceed 25% of the fund value.

What is the Old Pension Scheme?

The Old Pension Scheme (OPS) provides a monthly pension for government employees with at least ten years of service, based on their last basic salary and employed years. Several states, including Himachal Pradesh, Rajasthan, Chhattisgarh and Punjab, have reverted to the Old Pension Scheme, ditching the NPS.

It strains the central and state governments as there is no corpus, which could grow and reduce the liability for payments.

What are the features of OPS?

■ The OPS applies only to government employees.

■ Employees don’t have to contribute to the pension fund.

■ Monthly pension of 50% of last drawn salary for retired government employees, or the average earnings in the previous ten months, whichever is more.

■ The amount can increase with the revision of Dearness Allowance (DA) twice a year.

■ Retired employees will receive a gratuity payment — a maximum of Rs2 million.

■ The family will continue to receive the benefits after the pensioner’s death.

Can Non-Resident Indians invest in OPS?

No. NRIs cannot invest in OPS. It is only for government employees.

What’s the Unified Pension Scheme?

The Unified Pension Scheme (UPS) for government employees is a blend of the Old Pension Scheme (OPS) and the National Pension Scheme (NPS). Launched on August 24, 2024, it assures a pension of 50% of the basic salary for employees who joined the central government after January 1, 2004.

The scheme, which takes effect on April 1, 2025, is expected to benefit 2,300,000 employees. NPS subscribers can switch to UPS, which will start disbursals from the next financial year.

What are the UPS payouts?

The pension is based on the length of service and the last basic salary.

Assured pension: Employees who have served at least 25 years will receive a pension of 50% of the average basic salary in the last 12 months before retirement.

Minimum pension: Rs10,000 every month on retirement after at least ten years of employment.

Proportional payment: For employees who have served between 10 and 24 years, the compensation will be proportional to their service.

Family pension: 60% for the spouse after the pensioner’s death

Single payment: Lumpsum amount at the time of retirement

Inflation indexation: Dearness relief on assured pension, minimum pension and family pension to keep up with inflation.

Can Non-Resident Indians invest in UPS?

It’s a nascent scheme, launched only on August 24, 2024. Currently, there’s no provision for NRIs to invest in the fund.

How are pensions calculated?

NPS: The pension amount is not fixed as it is linked to market movements. Family pension depends on the pension fund corpus and the chosen annuity plan at retirement.

UPS: The assured pension will be the average basic salary plus Dearness Allowance in the last 12 months before superannuation.

OPS: The assured pension was fixed at 50% of the last drawn basic salary plus the Dearness Allowance.

How do contributions work in pension schemes?

UPS: Employees must contribute 10% of their basic pay plus Dearness Allowance. The government will contribute 18.5%.

NPS: Employees contribute 10% to NPS, while the government contributes 14%.

OPS: Employees don’t contribute, which makes the old pension scheme fiscally unsustainable.

What are the tax benefits?

NPS: A central government employee is eligible for tax benefits for the government’s contribution. A deduction of 14% is available under both old and new tax regimes for central and state government employees.

OPS: Since there is no employee contribution, tax benefits are unavailable.

UPS: Pension income could be taxed, but UPS allows for a tax-free lump sum withdrawal of 60% of the corpus.

How do the lumpsum payments (single payments) work?

UPS: The lump sum payment will be 1/10th of the monthly payment (salary and Dearness Allowance) at the time of retirement for every six months of service. This will not affect the assured pension.

NPS: Employees can withdraw 60% of the corpus on retirement, which is tax-free.

OPS: The lump sum payment can be taken at the time of retirement only through the commutation of pension, which reduces the pension amount.

Can you switch from UPS to NPS?

No. If a person opts for UPS, they cannot return to NPS. Employees who have chosen NPS or VRS (Voluntary Retirement Scheme) and new employees can join UPS but cannot move to NPS.