Should You Opt For Higher Pension Under The Employee Pension Scheme?
Here's the breakdown of everything you need to know about the recent changes made in the Employees’ Pension Scheme.
Source: Envato
The Employee Provident Fund Organisation has recently made changes to the Employees’ Pension Scheme that allows some members to receive a higher pension. There are a few questions that remain unanswered, however. Here’s a breakdown of everything you need to know.
How Does The EPS Work?
Most salaried employees in India make contributions to the Employee Provident Fund Organisation. The individual contributes 12% of their basic salary, and the employer matches this amount. The employer’s contribution is divided and funnelled into both the Employee Provident Fund and the EPS. The amount that goes into the EPS is 8.33% of basic salary.
Till now, the actual contribution has been capped at 8.33% of Rs 15,000. This limit was previously Rs 6,500. This means that the employer’s contribution to the EPS was restricted to Rs 1,250, even if the basic salary rose higher than Rs 15,000.
The remainder, if any, would go to the Employee Provident Fund.
At retirement, a member of the EPFO is eligible to receive a lump sum from the EPF. The member would also receive a monthly pension after the age of 58. An employee would receive a 4% higher pension each year if the receipt of pension was delayed by two years until the age of 60.
Higher Pension: Who Can Opt For It?
The EPFO, in a circular earlier this month, announced that those who were members of the EPFO on or before Sept. 1, 2014, and are currently employed could choose to make a higher contribution to the EPS. In such a situation, the employer’s contribution to the EPS would rise to 8.33% of the actual basic salary.
In our earlier example of an individual earning a basic salary of Rs 50,000, the employer’s contribution to EPS would rise to Rs 4,165. The contribution will be retrospective, and if the employee chooses to receive a higher pension, a transfer will occur from the Employee Provident Fund to the EPS.
Even those who were members as of Sept. 1, 2014, and retired after that are eligible for the higher pension. This would require a transfer by the individual back to the EPFO.
The higher pension rules will not apply to those who had chosen to receive a higher pension when the rules were changed on Sept. 1, 2014. Also, employees who earn more than Rs 15,000 per month and who became members of the EPFO after that date are not eligible.
By When Should You Apply?
The EPFO circular came as a consequence of a Supreme Court order on Nov. 4, 2022, which gave a deadline of four months to implement the change. The deadline, therefore, is March 3.
In its circular earlier this month, the EPFO said it would provide a URL that would allow for a digital application by eligible subscribers.
However, the EPFO has yet to provide the URL and other requisite information. "The method of deposit and that of computation of pension will follow through subsequent circular," it said.
Should You Apply For A Higher Pension?
The higher pension per month would result in a reduction in the lump sum received at retirement, which may prove to be a deterrent, according to Mrin Agarwal, founder and director of Finsafe India.
"I would recommend not to go ahead with a higher EPS in the absence of the right information and at the cost of reducing the EPF," she said. "The EPF contribution at retirement comes tax-free and can be structured to get regular monthly income, probably at a higher rate."
Also, in the event of death, the spouse of the member only receives half of the monthly pension, she said.
"It is the employees’ decision, whether they want to forego the compounding and then send it across to EPS or if they want to have the pension because there are other alternatives too that give you an annuity," said Prableen Bajpai, founder of FinFix Research and Analytics.