Old Pension Scheme in India: Full Details & 2025 Updates

The Old Pension Scheme is a scheme covering a retirement benefit available to many government employees in India where the employer (i.e., the government) will provide a fixed, life-time pension to a worker. A worker who is pre-retirement from the Old Pension Scheme will get a fixed percentage (which will be around 50 percent) from their last salary (or wages) in the form of a pension when they retire, which will be updated for inflation from time to time using dearness allowance or similar scheme. The Old Pension Scheme provided security, stability and a guaranteed benefit; thus, many of the pre-retired and retired government workers viewed it as some kind of economic safety-net guarantee.

The Old Pension Scheme is an interesting and modern topic of discussion in India, in part to its relevance to workers in the public sector and public finance issues. This paper will address the history, the characteristics, the comparison of older to newer pension regimes, the pros and cons of the Old Pension Scheme, its status in 2025, its implications, and future.

History and Background of OPS in India

The Old Pension Scheme was introduced in the years that followed Independence as part of a system of benefits for government employees. It was a defined benefit type of plan, which means that the retirement benefit was a set amount (generally in the neighborhood of 50 % of last salary) and was not determined by investment return in the financial markets. To support the payment of these benefits, funds had not been set aside; rather, the pensions were funded by the current revenue of the government as they became due—sometimes referred to as a “pay-as-you-go” plan.

In India, the Old Pension Scheme was available to ‘public sector’ employees until such time as reform was introduced by the government in January of 2004. On January 1, 2004, the central government replaced the Old Pension Scheme in the case of any new hires with the National Pension System (NPS) which was a defined-contribution plan.

The reason for the new scheme was due in part to the increased fiscal burden that OPS became – as more retired employees aged, the liability on government increased as the ratio of old-age pensions to new working-age employees decreased, meaning fewer employees contributing to support pensions. The NPS scheme was intended to share risk, tie pensions into contributions and market returns, and above all, to reduce unfunded liabilities.

States varied in their followership of the Centre’s lead with some adopting NPS-like schemes, some continuing OPS for certain categories of employees, and still other states later deciding to revert to OPS. For example, five states (Rajasthan, Chhattisgarh, Jharkhand, Punjab, and Himachal Pradesh) officially communicated to the Pension Fund Regulatory and Development Authority (PFRDA) their decision to return to OPS for state government employees.

Thus, historically, the Old Pension Scheme has been a dominant component of the retirement architecture for government employees in India, and its legacy and ramifications do continue to exist is relevant.

Key Features and Benefits of the Old Pension Scheme

Key Features

Defined Benefit: Under OPS, the pension is a complete amount, fixed generally at a percentage (say around 50%) of the last salary paid.
Unlimited duration pension: The pension is paid for as long as you live and could even continue for a spouse or dependents (family pension) after the retiree’s death.
Inflation linked / indexed to dearness allowance: The pension although paid under the OPS is sometimes at least linked to the dearness allowance / increases with inflation.
Employer met: The employer (government) picks up the entire cost and pays the pension from current revenues. The employee may contribute very little or not at all in some cases.
Non-contributory or minimal contribution by employee: In many types of OPS the employee has contributed little or nothing (in contrast to contributory schemes).
Ease of understanding: since it is a benefit that is fixed and not market dependent the retiree is able to know (or know very closely) what he / she will receive as a pension.

Benefits

Assurance and certainty: For government workers, the Old Pension Scheme offers a discrete assurance of lifelong income that is easier to plan around financially.
Not dependent on capital market volatility: Because it is a defined benefit and does not correlate with investment returns, retirees do not experience stock-market risk.
Attractive for recruitment/retention: Knowing that pension is guaranteed and consistent can draw employees into public sector service or entice them to stay in public service for longer periods.
Less financial literacy needed: Employees do not need to worry about managing their pension corpus or making investment decisions—they qualify by years of service.
Favorable to family beneficiaries: Family pension under OPS generally continues to support a spouse or dependents.

Thereby, the Old Pension Scheme is a very attractive value proposition for beneficiaries expecting long-term stability.

Eligibility Criteria and Implementation

Eligibility Criteria

Individuals employed in government service as stipulated by the governing rules and date of notification under Old Pension Scheme (OPS) become eligible for the benefits of OPS. For employees of the central government, the notification for the NPS (National Pension System) was effective approximately from 22 December 2003.
[$nThe qualifying period for service (e.g., minimum years of service) will vary between states or departments in relation to OPS eligibility.
[$nFor some states that have just recently returned to OPS, only newly hired employees or reappointed employees since their notification date may be eligible for OPS.
[$nSome states may have optional one-time windows or transitional provisions for employees who were hired prior to either the NPS notification date. For example, for employees of the central government, a one-time option was provided prior to the NPS notification date to employees appointed to certain posts which were advertised prior to NPS notification date.

Implementation

While OSS was in place, upon retirement a government Pension Payment Order (PPO) was issued indicating the amount of the pension and was used to determine the annual dearness allowance increases.
The onus is on the government to allocate money from the annual budget to fulfill pension liabilities.
In recent times some states have issued notifications indicating they are restoring OSS for their employees. States like Rajasthan, Chhattisgarh and Himachal Pradesh have notified a reversion to OSS as of 2022-23 and beyond.
No wide-ranging reinstatement of OSS for all central government employees has been approved at the central government level and the government has stated there is no proposed consideration for blanket reinstatement of OSS for central government employees.

Government Employees’ Perspective

From the perspective of a public sector employee, the Old Pension Scheme has some appealing aspects, but also some disadvantages:

Appealing aspects:

A lifetime pension is attractive and it is based on salary and time served and does not rely on volatile investments. The OPS is viewed by many government employees as a strong benefit, because it provides retirement income security.
It does help with retirement planning, since the amount received in pension is relatively predictable—an employee has a good idea of what they will receive.
The Family pension means that the benefit goes beyond the employee’s life, and is viewed as family friendly.
Employees newly hired in states that have reinstated the OPS may regard government employment as providing a more secure employment option than the private sector.

Caution

Employees who are subject to the new pension scheme may receive lesser benefits as they may be dependent on how well the investment corpus performs. Some staff feel NPS does not have the guarantee of the old pension scheme.
Employees may also have concerns about the longevity and future adjustments—if policies change, their pension benefit may be at-risk for revisions.
In states where OPS is being reinstated, there is often the issue of how transition will occur—such as what will happen to funds already contributed under NPS, or how incumbent employees will transition.
The benefit received under OPS may be generous, but future inflation or changes to Basic Pay scales or other allowances may impact an individual’s real value should these revisions not keep up with inflation or desired financial level.

Overall, employees still prefer the insurance of the Old Pension Scheme while being cognizant of potential changes to pension policy based on the state and/or central government as well as the larger fiscal situation.

Pros and Cons of the Old Pension Scheme

Pros

Income security: OPS offers a lifetime pension which means retirees do not have to depend on returns from their investments.
Simplified retirement planning: Predictable amounts for pensions mean planning for life after retirement can be done more reliably by employees.
Family security: Family pensions under OPS often guarantee ongoing assistance for dependents which enhances the financial safety of families.
Attraction of public sector: OPS enhances the attractiveness of government job offers by presenting a strong retirement benefit.
Inflation Protection: Many OPS pensions are tied to dearness allowance or inflation to help provide real income for pensioners.

Cons

Government fiscal burden: The scheme generates large unfunded liabilities on the employer because the benefit is guaranteed and completely government financed. The Reserve Bank of India (RBI) has advised states that reverting to OPS creates considerable fiscal risk and liability exposure.
Unsustainable with ageing workforce: To the extent pensioners accumulate and the working employee base may only grow slowly, liability increases significantly, and the scheme becomes less sustainable without a serious commitment of government funds.
Limited contribution by employees: The burden is largely borne by the employer, and if an employee contributes little, that burden is then often transferred to taxpayers rather than being shared by all.
Reduced flexibility: Because the pension is fixed, the retiree will not benefit from upside to investment returns as they would have if the OPS concept had been taken at the level of contribution; for example, if the markets perform well, OPS participants may lose out relative to NPS participants, particularly if they make and take a rational decision to actively manage their investments.
Equity risk: The guaranteed benefit feature means those recruited earlier or under OPS will pension much greater (relative to final salary). This can create intergenerational inequity.
Inflation risk if the adjustments fall behind: Even in the case of DA linkages, should inflation or salary increases exceed a pension adjustment, the real value will erode.

So, while the Old Pension Scheme has potentially strong benefits for an individual, it has considerable risks from a public finance perspective.

Current Status and Recent Updates (as of 2025)

As of 2025, the Old Pension Scheme is still in place in a few state government contexts, while it is out of use at the central government level, except in certain transitional instances. Some significant recent developments include:

The central government has made clear that it is not considering a return to the Old Pension Scheme for employees of the central government who are under the National Pension System (NPS).
Five states – Rajasthan, Chhattisgarh, Jharkhand, Punjab and Himachal Pradesh – have given official announcements for return, or openly indicated their intention for return, to OPS for state government employees.
The Reserve Bank of India has explicitly warned that a return to the OPS will create large unfunded liabilities for state governments and overall may threaten state finances.
The Modi government has initiated a Unified Pension Scheme (UPS) for central government employees that is effective 1 April 2025, and that gives a Guaranteed Pension rate of 50 % of the employees average basic pay after 25 years of qualifying service. While this is not literally the Old Pension Scheme (OPS) per se, it is the outcome of the demand for defined benefit and hybrid model pension schemes.
The Ministry has confirmed that the full Old Pension Scheme revival is not in the works for Central employees, although some Central employees may receive OPS-type benefits under UPS.

In summary, from a national perspective, the Old Pension Scheme is no longer the default for new entrants, exists in some states, and as a legacy scheme for old employees. States that returned must bear the future fiscal costs on their own.

Public Opinion and Economic Impact

Public Opinion

Government employees and trade unions love Old Pension Scheme – the guaranteed pension and stability are highly valued by employees. There have been protests in multiple states for OPS to be restored.
On the other side of this argument, economists, think tanks, and some policy-makers see OPS as fiscally unsustainable for the long run. The economic logic to support such a view would have to incorporate demographic shifts, inflation, growth in salaries, and the finite revenue of government. The concern is that pumping large crescendos of pension payments may crowd out other necessary areas of public spending.
Political parties use the promise of reinstating or maintaining OPS as fodder to lure-in government employees. Some analysts argue, while politically expedient, this creates a problem for longer-term circumstances.

Economic Impact

For states that have gone back to the Old Pension Scheme (OPS), the financial costs of the OPS are considerable. With the OPS following a defined benefit, fully government financed model, as the number of pensioners grows, so does the burden on the exchequer. According to the RBI report, returning to OPS may create “unfunded pension liabilities” for state governments.
The move away from the OPS (for new employees) to schemes such as the NPS was made in part to relieve fiscal pressure—i.e. add a contributory model while moving away from a pay-as-you-go system.
The OPS relies much less on employees to contribute, therefor the costs of the pension burden is borne fully by government budgets. In tightening fiscal conditions, the money for pensions may come at the expense of investments in health, infrastructure or education.
The potential costs of large pension burdens may lower the debt profile of state governments, reduce fiscal space, and create negative risk perceptions in all markets.
From the employees’ perspective, OPS means a dependable source of retirement income, which can add to their consumption, reduce pensioner poverty, and support overall aggregate demand.

In general, the economic impact is a mixed bag—good for individuals but difficult for public finances.

Conclusion and Future Outlook

The Old Pension Scheme is considered one of the most valuable pension benefits by many government employees in India due to the guaranteed defined benefit, lifetime benefit and ease of understanding. However, from a policy level, the scheme involves significant fiscal risk, particularly in a context of increasing longevity, wage increases, inflation, and government budgets that have limited resources.

As of 2025, an agreement has been reached in some Indian states to revert to OPS for their employees, but the central government has made it clear no central blanket restoration is in the works. The Unified Pension Scheme was introduced as a hybrid model with the intention of offering at least some security of a defined‐benefit pension with necessary fiscal discipline.

Looking into the future, the demise of OPS will likely focus on the following considerations:

Selective application: OPS may persist for certain employee cohorts or groups while those entering employment now would be enrolled in a different pension scheme.
Fiscal sustainability: Governments will have to figure out how to deal with pension liabilities and may do so via enhanced disclosures, prudential funds or actuarial accounting.
Transition arrangements: As more states transition back to OPS, one of the questions that will persist is how best to deal with those who have contributed to the NPS or other schemes.
Inflation and salary growth adjustments: For OPS pensioners, the maintenance of real income over decades will depend upon strong connections to inflation and pay rises.
Political dynamics: Pension policy is an important driver in employee and electoral politics, and any commitments to restore or improve OPS are likely to remain a feature that will create pressure on public finances.

To conclude, the Old Pension Scheme still shapes India’s pension system. While workers appreciate its certainty and simplicity, policymakers must consider what those guarantees mean in terms of long-term fiscal responsibility. For workers and for governments, the challenge is to ensure that retirement benefits are sustainable, fair, and secure in the coming decades.

FAQs

Q1. What is the Old Pension Scheme in simple terms?

The Old Pension Scheme is a retirement benefit scheme in which government employees are given a guaranteed pension—usually approximately fifty per cent of their last drawn salary—indexed to inflation, for their remaining life.

Q2. Who is eligible for the Old Pension Scheme?

Eligibility is determined by the date of hiring and the rules of the government body that is hiring. For central government employees in India, anyone hired before the NPS notification (approximately December 22, 2003) is eligible. For states, it depends on state notifications and whether the state has returned to OPS.

Q3. What is the major difference between OPS and NPS?

The major difference is OPS provides a guaranteed defined benefit pension fully funded by the government, while the National Pension System (NPS) is a defined contribution scheme where your pension is based on how much is contributed and investment returns.

Q4. What makes the Old Pension Scheme a difficult structure for government?

The Old Pension Scheme is a defined benefit structure with no employee contributions (or very limited contributions) and is funded from available current revenue, which creates significant unfunded liabilities as the number of pensioners increases and their total years of service accrue (and pensioners live longer). This could create an increasing burden for governments in their pension payments, which may cause budgetary constraints and possible inability to invest in other areas (or consider employee hiring).

Q5. Is the Old Pension Scheme returning in India?

As of 2025, certain states in India have officially reverted to the Old Pension Scheme for government employees, but the central government has made it clear it does not intend upon re-establishing the Old Pension Scheme for central government employees.

Q6. What should government employees do if under the Old Pension Scheme?

Employees under the Old Pension Scheme should track their years of service, understand the pension rules (including the family pension), and monitor if their state opens the possibility of making changes. Additionally, they should plan for contingencies that could arise, like inflation and increasing years of a spouse’s pension.

Q7. How is the Unified Pension Scheme (UPS) connected to the OPS?

The Unified Pension Scheme (UPS), effective 1 April 2025, is a newer scheme for central government employees, and provides a pension of 50 % of average basic pay at 25 years of service. While it is not the same as OPS, it exhibits attempts at providing a more defined benefit style pension while also being fiscally sustainable.

Q8. What are the risks for those in the Old Pension Scheme?

Main risks are inflation or pay growth adjustments over many years of retirement to be inadequate, policy or formula amendments introduced by the government, and the fiscal health of the government entity paying benefits in relation to guaranteeing timely payments.

Visit Also: NITI Aayog Internship 2025 | MDU Student Portal | Pavitra Portal Registration 2025