The Authorities (EPFO) has provided a selection to pick out eligible EPF/EPS subscribers to go for increased pension beneath EPS (Staff’ pension scheme).
An choice to earn the next pension throughout retirement.
Who would say “No” to such a proposal?
Nicely, there isn’t any free lunch on this world. Whereas there’s an choice to earn increased pension, it comes at a value.
The query: Do you have to go for increased pension beneath EPS?
On this publish, let’s have a look at the next points intimately.
- How a lot pension do you get beneath EPS? When does the pension begin and the way lengthy do you get it?
- How do you contribute to EPF and EPS?
- What’s this complete difficulty about increased pension? And why does this come up?
- Who’s eligible?
- What do you get if you happen to go for increased pension? What do you lose?
- When you go for increased pension, what portion of your EPF corpus shall be moved to EPS?
- What are the issues/drawbacks of EPS? These drawbacks may impression your determination.
- Do you have to go for increased pension beneath EPS? Or do you have to stick to the established order?
Mentioned this matter in a Twitter thread too.
How a lot pension do you get beneath EPS?
Month-to-month Pension = (Pensionable wage X Pensionable service)/70
Pensionable wage = Common of final 60 months of base wage (earlier it was final 12 months wage). The pensionable wage is now capped at Rs 15,000. Nevertheless, there’s a approach for previous staff (who joined workforce earlier than September 1, 2014) to get round this cover and earn pension on precise base wage. And that is the supply of your complete dispute that we are going to focus on on this publish.
Pensionable service = No. of years of contribution to EPS
I’ve learn in lots of locations that the pensionable service is capped at 35 years for the aim of pension calculation. Nevertheless, I couldn’t discover the supporting clause within the EPS Act. If such a cap is certainly there, it could move from one other algorithm/laws.
The pension begins on the age of 58. When you exit EPS on the age of 58 and have rendered greater than 20 years of pensionable service, 2 years shall be added to the pensionable service for calculation of pension.
You will have an choice to begin pension early (however not earlier than the age of fifty). The pension shall be diminished by 4% for yearly of early exit. May also defer however not past the age of 60.
Let’s perceive this with the assistance of an illustration.
Your final 60 months’ common base wage is Rs 1 lac. And also you had been contributing as per precise wage (not as per wage cap of Rs 15,000)
You will have rendered 33 years of pensionable service. Since you’ve got labored for over 20 years and are exiting on the age of 58, your pensionable service shall be 35 years.
Month-to-month pension = Rs 1 lac X 35/70 = Rs 50,000
- You’ll earn this pension of Rs 50,000 for all times.
- After you, your partner will earn 25,000 (50%) till he/she is alive.
- After your partner, your youngsters (most 2) will earn 25% pension every (Rs 12,500 every) till they flip 25.
- There are a couple of different provisions taking good care of nook instances. You’ll have to verify the EPS Act to see how pension provisions will apply in such instances.
Notice: When you had been contributing with a wage ceiling, you’re going to get pension of solely Rs 15,000 X 35/70 = Rs 7,500.
Whenever you see such a components for calculating pension in an outlined profit scheme, you’ll be able to sense this may be gamed. Such a components might have had some relevance within the years passed by however not now. Good that the Authorities has plugged the loophole, at the least for the brand new members.
By the way in which, how is the pension from EPS funded? It really works by your (your employer’s) contribution to EPS.
How does contribution to EPS and EPF work?
You contribute 12% of your base wage (Primary + DA) to EPF each month.
Your employer makes an identical contribution of 12%. Nevertheless, this 12% is invested in a special method.
Of this 8.33% goes in the direction of EPF (Worker pension scheme). And the rest (3.67%) goes to EPF.
Nevertheless, the wage on which EPS is calculated is capped at Rs 15,000 monthly.
Allow us to take into account an instance. Allow us to say your base wage is Rs 50,000.
Your contribution to EPF = 12% * 50000 = Rs 6,000.
You don’t contribute to EPS.
Your employer additionally contributes Rs 6,000 to your EPS+EPF.
What’s the breakup?
Employer contribution to EPS = 8.33% X Rs 15,000 = Rs 1,250 (because the ceiling wage of Rs 15,000 will get triggered).
Employer contribution to EPF = Rs 6,000 – Rs 1,250 = Rs 4,750
The Authorities additionally contributes 1.16% of your base wage to EPS topic to a wage cap of Rs 15,000 monthly.
This sounds all proper. The place is the issue?
The place is the issue?
The wage ceiling has stored altering. Earlier than the modification within the EPS scheme in 2014, the ceiling was Rs 6,500.
Nicely, that’s additionally effective. I don’t see any downside there.
Had the above wage ceilings concrete, all the things would have been effective.
Nevertheless, the EPS guidelines allowed staff to contribute over and above the wage ceiling cap. (Btw, the modification in EPS scheme in 2014 plugged this loophole and the staff becoming a member of the workforce after September 1, 2014 can’t contribute above the ceiling cap of Rs 15,000).
However this doesn’t forestall staff who had been member of EPS scheme earlier than September 1, 2014 (and nonetheless are OR retired after September 1, 2014) from contributing above the wage ceiling (Rs 5,000/Rs 6,500/ Rs 15,000). And earn a HIGHER PENSION.
And this has led to all of the confusion.
Notice that EPS is an outlined profit scheme (not like NPS which is an outlined contribution)
How does this result in confusion?
There are a number of pathways.
Case 1
In some instances, your employer caps contribution to EPF to wage ceiling of Rs 15,000 (wage ceiling has stored altering. It was Rs 5,000 earlier. Then to Rs 6,500 and now to Rs 15,000).
Therefore, even when your fundamental wage is Rs 50,000, you’ll contribute solely Rs 1,800 (12% of Rs 15,000). Your employer will contribute 1,250 (8.33% of Rs 15,000) to EPS. And Rs 550 to EPF.
When you belong right here, you aren’t eligible for HIGHER PENSION. Why? As a result of you’ve got been contributing solely as per the wage cap.
Case 2
Your employer doesn’t cap contribution. You contribute on precise wage (and never based mostly on wage cap). Precise base wage of Rs 50,000.
Your contribution to EPF = 12% X Rs 50,000 = Rs 6,000.
Your contribution to EPS is NIL.
Employer contribution to EPS = 8.33% X 50,000 = Rs 4,165
Employer contribution to EPF = 3.67% X 50,000 = Rs 1,835
You might be eligible for increased pension.
Nevertheless, there was a technical rule right here the place the worker and employer needed to convey this determination to EPFO inside sure timelines. Provision to Para 11(3) of the scheme earlier than modification in 2014. I reproduce the supply under.
Therefore, there have been situations the place individuals had contributed extra to EPS with out explicitly stating this selection.
Once they reached out to EPFO for increased pension, EPFO rejected their declare for increased pension (and gave pension as per the ceiling cap) since these staff didn’t specify this selection explicitly with said timelines. And refunded extra contribution within the EPS to the EPF accounts of the staff with curiosity.
Such staff challenged EPFO within the courts and gained. The Supreme Court docket discovered these timelines arbitrary and dominated in favour of such staff. Eligible for increased pension. You may examine this case about Mr. Praveen Kohli right here.
Case 3
Your employer doesn’t cap contribution. You contribute on precise wage (and never based mostly on wage cap). Precise base wage of Rs 50,000.
Your contribution to EPF = 12% X Rs 50,000 = Rs 6,000.
Your contribution to EPS is NIL.
Employer contribution to EPS = 8.33% X 15,000 = Rs 1,250 (whereas the employer doesn’t cap contribution to EPF, it caps the EPS contribution)
Employer contribution to EPF = 6,000 – Rs 1,250 = Rs 4,750
Because the EPS contribution has been made as per the wage cap of Rs 15,000, you’ll get pension solely as per the wage cap. Not increased pension.
When you belong right here, this current EPFO round dated Feb 20, 2023 will curiosity you.
Why?
As a result of you’ve got an choice to replenish a type and make sure that you really want the next pension now. Since there’s free lunch, EPFO will switch a portion of cash (deficit contribution to EPS together with curiosity from EPF to EPS). To your future contributions additionally, you (your employer) must contribute extra to EPS.
So, increased pension however a decrease EPF corpus. Within the latter a part of the publish, we are going to see find out how to consider these selections.
Who’s eligible for increased pension beneath EPS?
I reproduce an extract from EPFO round dated February 20, 2023.
The round refers to eligibility for exercising this new choice for increased pension by filling up a type.
- You have to have been a member of EPS as on September 1, 2014. Due to this fact, if you happen to began working after September 1, 2014, you’re NOT eligible. OR if you happen to retired earlier than September 1, 2014, you’re NOT eligible for increased pension.
- Your (and your employer’s) contribution to EPF (as on September 1, 2014) was on the wage that exceeded the wage ceiling cap of Rs 5,000 or Rs 6,500. Let’s say your base wage was 25,000 and also you had been contributing on the precise wage of Rs 25,000 (and never as per wage cap of Rs 15,000). You might be ELIGIBLE even when your EPS contribution was capped however your EPF contribution was on precise wage.
Tips on how to apply for Larger Pension beneath EPS?
The EPFO round lays down the strategy.
You have to make a joint utility alongside together with your employer to EPF. As issues stand right now, you should apply earlier than March 3, 2023 (4 months from the Supreme court docket judgement).
Given the confusion surrounding this matter, I hope the deadline is prolonged.
Recommend you attain out to the accounts crew of your employer for the operational particulars.
Do you have to go for Larger pension beneath EPS?
When you go for Larger pension, you’re going to get increased pension. Threat-free. Assured for all times. And that’s the greatest benefit.
How excessive a pension will you get?
Nicely, that is dependent upon your common base wage within the ultimate 5 years of your work life (and years of pensionable service).
Now, you can not reply this query precisely, particularly in case you are within the personal sector the place salaries can fluctuate drastically. If you’re working with a PSU and are nearer to retirement, you will have a firmer grip on the reply.
Nonetheless, take educated guesses. How a lot increment you’ve got been receiving the previous couple of years? And with these assumptions, you’ll be able to arrive on the ultimate pension quantity.
And also you examine that in opposition to the options? Don’t you?
Firstly, the upper pension comes at a value. Your EPF corpus will go down as a good portion of your EPF corpus shall be shifted to EPS scheme. Your future contribution to EPF will even fall since you’ll now contribute extra to EPF.
After retirement, you’ll get this corpus and you may make investments this cash in financial institution fastened deposits, Authorities Bonds, SCSS, PMVVY and even annuity plans to generate common retirement revenue.
So, you should see, how a lot EPF corpus are you foregoing? And the way simple or tough it’s so that you can generate an analogous degree of revenue utilizing this corpus? If you are able to do that simply, then keep the established order. When you can not (the speed of return shall be fairly excessive), then go for the next pension.
When you go for Larger pension, what portion of EPF shall be shifted to EPS?
Within the aforementioned EPFO round dated Feb 20, 2023, EPFO has talked about, “The tactic of deposit and that of computation of pension will observe by subsequent round”.
Deposit means deposit from EPF to EPS. To be trustworthy, it’s unfair to anticipate staff to select till EPF comes out with these calculations. Keep in mind, the Supreme court docket handed its judgement on November 3, 2022, and gave 4 months (till March 3, 2023) to members (staff) to make their selection. And EPFO says on Feb 20, 2023, that they’ll difficulty a subsequent round for calculations.
Let’s do some crude calculations and see how a lot shall be moved out of your EPS corpus.
Let’s say you began working within the yr 2001.
Your base wage at the start was Rs 20,000 and grew at 5% every year. I’ve assumed that EPF returned 8.5% p.a. all through the tenure.
The wage cap was Rs 6,500 till September 2014 and Rs 15,000 thereafter.
When you had been contributing to EPF on precise wage, the contribution to EPS was solely as per cap.
Within the first yr, Base wage =20,000
Worker EPF contribution = 20,000 * 12% = Rs 2,400
Employer EPS contribution = 8.33% * 6,500 = Rs 542 (if this had been on precise wage, employer would have invested Rs 1,667)
Employer EPF contribution = Rs 2,400 – Rs 542 = Rs 1,858 (if EPS contribution had been on precise wage, this may have been Rs 2,400 – Rs 1,667 = Rs 733
The deficit contribution to EPS = Rs 1,667 – Rs 542 = Rs 1,125
Now, this deficit contribution to EPS (that went to EPF) must be shifted again to the EPS scheme. And the curiosity on this deficit contribution too. And this have to be achieved to your total previous service.
How a lot will this quantity be?
This may rely upon the trajectory of your wage development. The upper your wage, the upper the deficit contribution. And the extra (in share phrases) you’ll have to switch from EPF to EPS.
Proportion of switch= Complete deficit contribution to EPS/Complete Contribution to EPF
On this instance, whole contribution to EPF (consists of each employer and worker) = Rs 21.63 lacs
Complete deficit contribution to EPS = Rs 6.06 lacs
Proportion of EPF to be transferred to EPS = Rs 6.06/21.63 lacs = 28%
You may also examine the EPF corpus. Present vs the EPF corpus you’ll have with out EPS contribution being capped. You’ll get the identical reply.
I did very crude EPF calculations (not precise). Present corpus = ~51.66 lacs
EPF corpus after eradicating EPS cap = Rs 37.14 lacs. A distinction of 28%.
Notice this distinction can be increased for the next base wage.
On this instance, if we alter the beginning base wage from Rs 20,000 to Rs 50,000, the switch share rises to 32%.
If beginning base wage drops to Rs 10,000, the switch share falls to 19.8%.
And that’s not it
When you go for increased pension, your employer’s future contribution to EPS will rise and to EPF will fall. That will even decelerate the expansion of EPF corpus.
Extending the instance to pending 10 years of service, if you happen to go for increased pension, you’ll finish with Rs 1.04 crores of EPF corpus after 10 years.
Had you caught with decrease pension, you’ll have Rs 1.46 crores.
What would be the pension?
Common base wage within the final 5 years = Rs 86,645
Month-to-month pension = 86,645 X 35/70 = Rs 45,798
Even if you happen to caught with decrease pension choice (established order), you’ll get pension of Rs 7,500 (Rs 15,000 X 35/70).
Distinction of Rs 41.68 lacs in EPF corpus.
Distinction in EPS pension = Rs 45,798 – Rs 7,500 = Rs 38,298
Now, for this Rs 41.68 lacs to generate revenue of Rs 38,298 monthly, it must generate a return of 11% p.a. That’s not simple.
Taking a look at such an evaluation, choosing increased pension appears to be like like a better option.
However EPS has its personal set of issues.
What are the issues with pension beneath EPS?
Firstly, you get the complete pension till you’re alive. After you (the first pensioner passes away) your partner will get the pension however solely 50% of the unique quantity. And after the partner passes away, a most of two youngsters will get 25% every till they’re 25.
I’m imagining a morbid state of affairs, however the household doesn’t get as a lot if you happen to (the first pensioner) go away too quickly after retirement.
Had you caught with a decrease pension, you’ll have gotten a a lot larger EPF corpus at retirement. Now, this EPF corpus belongs to you. And after you, it belongs to your loved ones. So, this extra EPF corpus might not be capable of generate as excessive revenue as EPS however this EPF corpus belongs to you and your loved ones.
Secondly, the pension is dependent upon the final 5 years (60 months) of base wage. So, if you happen to resolve to take a step off the accelerator when you cross 50 and choose up a job that pays much less, your common revenue in the course of the ultimate 5 years of your working life might fall. And therefore the pension shall be decrease.
As an illustration, allow us to assume your common base wage between the age of 48 and 53 was Rs 2 lacs. And the typical base wage between 53 and 58 years was 1 lac. The pension can be calculated for the typical wage within the final 5 years i.e. Rs 1 lac. That you’re incomes extra earlier than that doesn’t matter.
Thirdly, if you wish to retire early, then your pensionable years of service shall be much less, and the pension will accordingly be decrease. Plus, the pension quantity doesn’t begin earlier than the age of fifty. Allow us to take into account an instance. You began working on the age of 25 and labored till the age of 45. 20 years of service. Let’s additional assume that your common wage within the final 5 years was Rs 1 lac. Therefore, your month-to-month pension can be Rs 1 lac X 20/ 35 = Rs 57,142.
Nevertheless, if you need this full pension, you’ll have to wait till the age of 58. However you retired on the age of 45. There’s an choice to begin drawing earlier however not earlier than you flip 50. The early withdrawal comes at a value. You get 4% much less for every year of early withdrawal. So, if you happen to begin at 50, you’re going to get 8 X 4% = 32% much less. Rs 38,857 as an alternative of Rs 57,142.
Lastly (and I’m not positive about this), the choice for the next pension is a joint choice exercised by you and your employer. You might be in a personal job and have opted for the next pension (and your present employer is happy with this). You turn your job after a couple of years and the brand new employer has a special coverage about contributions. Caps the contribution as per wage ceiling. You may ask them to make an exception for you, however it is a headache. This risk would make me extraordinarily uncomfortable.
Notice: The newest EPS guidelines additionally present for workers to contribute 1.16% of Primary wage (for the portion exceeding Rs 15,000) to EPF in the event that they wish to obtain the next pension.
In the intervening time, the Supreme Court docket has put this on maintain. For extra on this, confer with web page 7 of this doc. Since this pertains to funding of EPS pool, you’ll be able to anticipate this to return to you in some type or the opposite later.
What’s the ultimate verdict?
There isn’t any one-size-fits-all resolution.
Going by numbers (and as we now have seen above), choosing the upper pension will certainly provide you with a really excessive pension. It will be tough to copy the identical degree of risk-free revenue out of your EPF corpus.
Nevertheless, the upper pension comes with many ifs and buts. Many caveats. You lose flexibility.
You have to weigh the upper pension in opposition to these issues in EPS.
I get extraordinarily uncomfortable if you happen to take away flexibility from my investments. Therefore, please recognize my biases in my ultimate feedback.
If you’re nearer to retirement and are happy with all of the caveats (as talked about within the earlier part), you’ll doubtless be higher off by signing up for Larger pension. However verify the calculations earlier than taking a ultimate name.
If you’re youthful (35-40), connect higher weight to issues/caveats/lack of flexibility in EPS.
Disclaimer: Whereas I’ve tried my greatest to know and clarify the subject intimately, there could also be shortcomings in my evaluation or my understanding of the EPS scheme and the EPFO round.
