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Sunday, February 26, 2023

Do you have to go for Larger Pension below EPS?

The Authorities (EPFO) has provided a selection to pick eligible EPF/EPS subscribers to go for greater pension below EPS (Staff’ pension scheme).

An choice to earn the next pension throughout retirement.

Who would say “No” to such an possibility?

Nicely, there isn’t any free lunch on this world. Whereas there may be an choice to earn greater pension, it comes at a value.

The query: Do you have to go for greater pension below EPS?

On this submit, let’s take a look at the next elements intimately.

  1. How a lot pension do you get below EPS? When does the pension begin and for the way lengthy?
  2. How do you contribute to EPF and EPS?
  3. What’s this complete problem about greater pension? And why does this come up?
  4. What do you get should you go for greater pension? What do you lose?
  5. When you go for greater pension, what portion of your EPF corpus might be moved to EPS?
  6. What are the issues/drawbacks of EPS? These drawbacks would possibly impression your resolution.
  7. Do you have to go for greater pension below EPS? Or do you have to keep on with the established order?

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. Nonetheless, there’s a method 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 entire dispute that we’ll focus on on this submit.

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. Nonetheless, I couldn’t discover the supporting clause within the EPS Act. If such a cap is certainly there, it might move from one other algorithm/rules.

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 might be added to the pensionable service for calculation of pension.

You have got an possibility to begin pension early (however not earlier than the age of fifty). The pension might 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 have got 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 might be 35 years.

Month-to-month pension = Rs 1 lac X 35/70 = Rs 50,000

  1. You’ll earn this pension of Rs 50,000 for all times.
  2. After you, your partner will earn 25,000 (50%) till he/she is alive.
  3. After your partner, your kids (most 2) will earn 25% pension every (Rs 12,500 every) till they flip 25.
  4. There are a couple of different provisions taking good care of nook circumstances. You’ll have to test the EPS Act to see how pension provisions will apply in such circumstances.

Be aware: When you had been contributing with a wage ceiling, you’ll get pension of solely Rs 15,000 X 35/70 = Rs 7,500.

Whenever you see such a method for calculating pension in an outlined profit scheme, you’ll be able to sense this may be gamed. Such a method 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 means of 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%. Nonetheless, 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.

Nonetheless, the wage on which EPS is calculated is capped at Rs 15,000 per thirty days.

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 per thirty days.

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.

Nicely, that’s additionally tremendous. I don’t see any downside there.

Had the above wage ceilings concrete, all the things would have been tremendous.

Nonetheless, 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 workers 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.

Be aware 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 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.

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’re eligible for greater pension.

Nonetheless, 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 supply beneath.

higher pension under EPS

Therefore, there have been situations the place folks had contributed extra to EPS with out explicitly stating this selection.

Once they reached out to EPFO for greater pension, EPFO rejected their declare for greater 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 workers with curiosity.

Such staff challenged EPFO within the courts and gained. The Supreme Courtroom discovered these timelines arbitrary and dominated in favour of such staff. Eligible for greater 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 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

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 greater pension.

When you belong right here, this current EPFO round dated Feb 20, 2023 will curiosity you.


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 may be 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, greater pension however a decrease EPF corpus. Within the latter a part of the submit, we’ll see methods to consider these decisions.

Who’s eligible for greater pension below EPS?

I reproduce an extract from EPFO round dated February 20, 2023.

higher pension under EPS

The round refers to eligibility for exercising this new possibility for greater pension by filling up a kind.

  1. You could have been a member of EPS as on September 1, 2014.  Subsequently, should you began working after September 1, 2014, you might be NOT eligible. OR should you retired earlier than September 1, 2014, you might be NOT eligible for greater pension.
  2. 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.

How one can apply for Larger Pension below EPS?

The EPFO round lays down the strategy.

You could make a joint utility alongside together with your employer to EPF. As issues stand at the moment, you will need 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.

Recommend you attain out to the accounts workforce of your employer for the operational particulars.

Do you have to go for Larger pension below EPS?

When you go for Larger pension, you’ll get greater pension. Danger-free. Assured for all times. And that’s the greatest benefit.

How excessive a pension will you get?

Nicely, that will depend on your common base wage within the last 5 years of your work life (and years of pensionable service).

Now, you can’t reply this query precisely, particularly in case you are within the non-public sector the place salaries can fluctuate drastically. In case you are 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 last pension quantity.

And also you evaluate that towards the alternate 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 might be shifted to EPS scheme. Your future contribution to EPF may 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 mounted deposits, Authorities Bonds, SCSS, PMVVY and even annuity plans to generate common retirement earnings.

So, you will need to see, how a lot EPF corpus are you foregoing? And the way straightforward or tough it’s so that you can generate an identical stage of earnings utilizing this corpus? If you are able to do that simply, then preserve the established order. When you can not (the speed of return might be fairly excessive), then go for the next pension.

When you go for Larger pension, what portion of EPF might 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 means of 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 problem a subsequent round for calculations.

Let’s do some crude calculations and see how a lot might 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% each 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 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 executed in your complete previous service.       

How a lot will this quantity be?

This can rely on 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 can even 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 actual). 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 greater for the next base wage.

On this instance, if we modify 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%.

And that’s not it

When you go for greater pension, your employer’s future contribution to EPS will rise and to EPF will fall. That may even decelerate the expansion of EPF corpus.

Extending the instance to pending 10 years of service, should you go for greater 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 should you 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 per thirty days, it must generate a return of 11% p.a. That’s not straightforward.

Taking a look at such an evaluation, choosing greater pension seems like a more sensible choice.

However EPS has its personal set of issues.

What are the issues with pension below EPS?

Firstly, you get the complete pension till you might be 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 children 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 should you (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 might not be capable of generate as excessive earnings as EPS however this EPF corpus belongs to you and your loved ones.

Secondly, the pension will depend on the final 5 years (60 months) of base wage. So, should you determine to take a step off the accelerator when you cross 50 and decide up a job that pays much less, your common earnings in the course of the last 5 years of your working life might fall. And therefore the pension might be decrease.

As an example, 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 could 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 might 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 could be Rs 1 lac X 20/ 35 = Rs 57,142.

Nonetheless, 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 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, should you begin at 50, you’ll get 8 X 4% = 32% much less. Rs 38,857 as a substitute of Rs 57,142.

Lastly (and I’m not positive about this), the choice for the next pension is a joint possibility exercised by you and your employer. You’re in a non-public 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 possibly can ask them to make an exception for you, however this can be a headache. This chance would make me extraordinarily uncomfortable.

Be aware: The most recent EPS guidelines additionally present for workers to contribute 1.16% of Fundamental wage (for the portion exceeding Rs 15,000) to EPF in the event that they need to obtain the next pension.

opt for higher pension under EPS

In the intervening time, the Supreme Courtroom has put this on maintain. For extra on this, check 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 kind or the opposite later.

What’s the last verdict?

There isn’t any one-size-fits-all answer.

Going by numbers (and as we’ve got seen above), choosing the upper pension will certainly offer you a really excessive pension. It might be tough to duplicate the identical stage of risk-free earnings out of your EPF corpus.

Nonetheless, the upper pension comes with many ifs and buts. Many caveats. You lose flexibility.

You could weigh the upper pension towards these issues in EPS.

I get extraordinarily uncomfortable should you take away flexibility from my investments. Therefore, please respect my biases in my last feedback.

In case you are 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.

In case you are youthful (35-40), connect higher weight to issues/caveats/lack of flexibility in EPS.

Disclaimer: Whereas I’ve tried my finest 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.

Supply/Further Hyperlinks

Newest Staff’ Pension Scheme (EPS), 1995

EPFO round dated February 20, 2023

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