The Authorities (EPFO) has supplied a selection to pick eligible EPF/EPS subscribers to go for increased pension below EPS (Staff’ pension scheme).
An choice to earn the next pension throughout retirement.
Who would say “No” to such a proposal?
Effectively, 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: Must you go for increased pension below EPS?
On this publish, let’s have a look at the next features intimately.
- How a lot pension do you get below 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 concern 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?
- Should 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 affect your resolution.
- Must you go for increased pension below EPS? Or must you keep on with the established order?
Mentioned this subject in a Twitter thread too.
How a lot pension do you get below EPS?
Month-to-month Pension = (Pensionable wage X Pensionable service)/70
Pensionable wage = Common of final 60 months of base wage (earlier it was once final 12 months wage). The pensionable wage is now capped at Rs 15,000. Nevertheless, there’s a approach for previous workers (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 the complete dispute that we’ll talk about 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 might circulate from one other algorithm/rules.
The pension begins on the age of 58. Should 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 could have an possibility to start out pension early (however not earlier than the age of fifty). The pension shall be decreased 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 could 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 monthly for all times.
- Demise of pensioner with Surviving partner: After you, your partner will earn 25,000 (50%) till he/she is alive (or will get remarried). As well as, your kids will get 6,250 (12.5%) monthly till they flip 25. Max 2 kids. That makes it a most of 75% (50% to partner+ 12.5% every to 2 youngsters) pension to the household.
- Subsequent demise of partner (pensioner had handed away earlier): If the partner passes away subsequently, the pension to the youngsters (most 2) will improve to 37.5% every. Till the age of 25. That’s once more a most of 75%.
- Demise of pensioner with out surviving partner: If there isn’t any surviving partner, the youngsters (most 2) get orphan pension (37.5% every) till the age of 25. Most of 75% of member’s pension to the household.
- There are just a few different provisions caring for nook circumstances. You’ll have to test the EPS Act to see how pension provisions will apply in such circumstances.
Be aware: Should 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 formulation for calculating pension in an outlined profit scheme, you may sense this may be gamed. Such a formulation could have had some relevance within the years passed by however not now. Good that the Authorities has plugged the loophole, a minimum of for the brand new members.
By the best way, 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 (Fundamental + DA) to EPF each month.
Your employer makes an identical contribution of 12%. Nevertheless, this 12% is invested in a unique method.
Of this 8.33% goes in direction of EPS (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 think about 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 saved altering. Earlier than the modification within the EPS scheme in 2014, the ceiling was Rs 6,500.
Effectively, that’s additionally nice. I don’t see any drawback there.
Had the above wage ceilings concrete, the whole lot would have been nice.
Nevertheless, the EPS guidelines allowed workers 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 stop workers 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.
Be aware that EPS is an outlined profit scheme (in contrast to NPS which is an outlined contribution)
How does this result in confusion?
There are a number of pathways.
Case 1
In some circumstances, your employer caps contribution to EPF to wage ceiling of Rs 15,000 (wage ceiling has saved altering. It was Rs 5,000 earlier. Then to Rs 6,500 and now to Rs 15,000).
Therefore, even when your primary 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.
Should 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 primarily based 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’re eligible for increased pension.
Nevertheless, there was a technical rule right here the place the worker and employer needed to convey this resolution to EPFO inside sure timelines. Provision to Para 11(3) of the scheme earlier than modification in 2014. I reproduce the availability beneath.
Therefore, there have been cases 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 workers didn’t specify this selection explicitly with acknowledged timelines. And refunded extra contribution within the EPS to the EPF accounts of the staff with curiosity.
Such workers challenged EPFO within the courts and gained. The Supreme Court docket discovered these timelines arbitrary and dominated in favour of such workers. Eligible for increased pension. You possibly can examine this case about Mr. Praveen Kohli right here.
Case 3
Your employer doesn’t cap contribution. You contribute on precise wage (and never primarily based 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
For the reason that 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.
Should you belong right here, this latest EPFO round dated Feb 20, 2023 will curiosity you.
Why?
As a result of you’ve got an choice to refill a kind 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). In your future contributions additionally, you (your employer) should contribute extra to EPS.
So, increased pension however a decrease EPF corpus. Within the latter a part of the publish, we’ll see easy methods to consider these selections.
Who’s eligible for increased pension below EPS?
I reproduce an extract from EPFO round dated February 20, 2023.
The round refers to eligibility for exercising this new possibility for increased pension by filling up a kind.
- 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’re ELIGIBLE even when your EPS contribution was capped however your EPF contribution was on precise wage.
Easy methods to apply for Larger Pension below EPS?
The EPFO round lays down the tactic.
You have to make a joint utility alongside along with your employer to EPF. As issues stand right now, it’s essential to 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.
Counsel you attain out to the accounts workforce of your employer for the operational particulars.
Must you go for Larger pension below EPS?
Should you go for Larger pension, you’re going to get increased pension. Danger-free. Assured for all times. And that’s the greatest benefit.
How excessive a pension will you get?
Effectively, that is dependent upon your common base wage within the last 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 non-public 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 few years? And with these assumptions, you may arrive on the last pension quantity.
And also you evaluate 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 can even fall since you’ll now contribute extra to EPF.
After retirement, you’ll get this corpus and you’ll make investments this cash in financial institution mounted deposits, Authorities Bonds, SCSS, PMVVY and even annuity plans to generate common retirement earnings.
So, it’s essential to see, how a lot EPF corpus are you foregoing? And the way simple or troublesome it’s so that you can generate an analogous degree of earnings utilizing this corpus? If you are able to do that simply, then keep the established order. Should you can not (the speed of return shall be fairly excessive), then go for the next pension.
Should 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 strategy 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 workers 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 (workers) to make their selection. And EPFO says on Feb 20, 2023, that they’ll concern a subsequent round for calculations.
EPFO, in its round dated Might 11, 2023, got here out with the calculation methodology for the way a lot quantity shall be shifted from EPF to EPS Should you select to use for increased pension.
For this, you’ve got calculate 2 quantities.
A = Quantity that ought to have gone to EPS (if you happen to had exercised increased pension possibility on the very starting)
B = Precise Quantity that has gone to EPS
To calculate A
- We should always first calculate the EPS contribution for every month on precise wage (and never capped wage)
- As much as August 31, 2014: On the charge of 8.33% out of 12% employer contribution on increased pay (from November 16, 1995 or from the date the pay exceeds the wage ceiling, whichever is later).
- From September 1, 2014: 8.33% of the 12% employer contribution as much as primary pay of Rs 15,000. 9.49% of the 12% employer contribution exceeding Rs 15,000
- For every month, deduct the quantity that was initially transferred to the EPS in that month. That is the deficit quantity that must be transferred to EPS.
- Not simply the deficit quantity, the curiosity earned on such deficit quantities should even be transferred to EPS.
Should you can work out this math, you’ve got the reply.
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 in the beginning 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.
Whilst 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 might 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) should be shifted again to the EPS scheme. And the curiosity on this deficit contribution too. And this should be performed to your whole previous service.
How a lot will this quantity be?
It will depend upon the trajectory of your wage progress. The upper your wage, the upper the deficit contribution. And the extra (in proportion phrases) you’ll have to switch from EPF to EPS.
Share of switch= Whole deficit contribution to EPS/Whole Contribution to EPF
On this instance, whole contribution to EPF (contains each employer and worker) = Rs 21.63 lacs
Whole deficit contribution to EPS = Rs 6.06 lacs
Share of EPF to be transferred to EPS = Rs 6.06/21.63 lacs = 28%
You may also evaluate the EPF corpus. Present vs the EPF corpus you’ll have with out EPS contribution being capped. You’d 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%.
Be aware this distinction could 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 proportion rises to 32%.
If beginning base wage drops to Rs 10,000, the switch proportion falls to 19.8%.
What is that this 8.33% and 9.49%?
We learn about employer contribution of 8.33% of your primary pay to EPS account. Effectively, that’s not sufficient to fund your EPS pension. The Authorities contributes an extra 1.16% to your EPS account to fund the pension.
The Authorities is ok with contributing 1.16% as much as the wage ceiling restrict of Rs 15,000. Past that, not a lot. That’s why within the EPS pension guidelines in 2014, EPFO has clearly talked about that if you happen to go for increased pension, this 1.16% has to come back from the subscriber (you).
The Honorable Supreme Court docket had put this on maintain. For extra on this, check with web page 7 of this doc. Nevertheless, the Authorities of India clarified this by a Gazette notification dated Might 3, 2023.
Going ahead, you (your employer in your behalf) will contribute 8.33% on primary wage as much as 15,000 and 9.49% on the portion exceeding Rs. 15,000.
Your future EPF contributions will fall
Should you go for increased pension, your employer’s future contribution to EPS will rise and to EPF will fall. That can even decelerate the expansion of EPF corpus.
As talked about within the earlier part, your employer will now contribute 8.33% of your primary wage to your EPS account. And for the portion of primary wage exceeding Rs 15,000, the employer contribution shall be even increased at 9.49%. As extra money goes to EPS, much less cash goes to EPF.
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 possibility (establishment), 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 earnings of Rs 38,298 monthly, it must generate a return of 11% p.a. That’s not simple.
such an evaluation, choosing increased pension appears like a better option.
However EPS has its personal set of issues.
What are the issues with pension below 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 situation, however the household doesn’t get as a lot if you happen to (the first pensioner) cross away too quickly after retirement.
Had you caught with a decrease pension, you’ll have gotten a a lot greater 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 could not be capable to generate as excessive earnings 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 earnings through the last 5 years of your working life could 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 common base wage between 53 and 58 years was 1 lac. The pension could be calculated for the common 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 think about 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 could be Rs 1 lac X 20/ 35 = Rs 57,142.
Nevertheless, in order for you this full pension, you’ll have to wait till the age of 58. However you retired on the age of 45. There’s an possibility to start out drawing earlier however not earlier than you flip 50. The early withdrawal comes at a value. You get 4% much less for annually 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 a substitute of Rs 57,142.
Lastly (and I’m not certain about this), the choice for the next pension is a joint possibility exercised by you and your employer. You’re in a personal job and have opted for the next pension (and your current employer is happy with this). You turn your job after just a few years and the brand new employer has a unique coverage about contributions. Caps the contribution as per wage ceiling. You possibly can ask them to make an exception for you, however it is a headache. This risk would make me extraordinarily uncomfortable.
What’s the last verdict?
There isn’t a one-size-fits-all resolution.
Going by numbers (and as we have now seen above), choosing the upper pension will certainly provide you with a really excessive pension. It might be troublesome to copy the identical degree of risk-free earnings 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 respect my biases in my last feedback.
If you’re nearer to retirement and are happy with all of the caveats (as talked about within the earlier part), you’ll seemingly be higher off by signing up for Larger pension. However test the calculations earlier than taking a last name.
If you’re youthful (35-40), connect larger weight to issues/caveats/lack of flexibility in EPS.
Disclaimer: Whereas I’ve tried my greatest to grasp and clarify the subject intimately, there could also be shortcomings in my evaluation or my understanding of the EPS scheme and the EPFO round.
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