Full Title: Why You Should Pay More to the EPS and Why You Shouldn’t
Highlights
…under the EPF scheme, an employee generally contributed 12% of their Basic and Dearness Allowance (DA) to the EPF. The employer made a matching 12% contribution, but of this, 8.33% went to the EPS and the rest to the EPF. There was a catch, though. The 8.33% was calculated on a maximum of Rs 15,000 (US184)amonth—thatis,onlyRs1,250(US15) went to the EPS. Everything else went to the EPF. (View Highlight)
Now, the EPF corpus earns interest as per rates declared by the government each year, but the EPS balance does not. Instead, it is used to give employees a monthly pension after retirement. This is determined by a formula—pensionable salary multiplied by pensionable service, divided by 70. (View Highlight)
Pensionable salary is the average of Basic and DA in the last 12 months of service, capped at Rs 15,000 a month. Pensionable service is the number of years of contribution, capped at 35 years. You are eligible for pension only if you’ve served for at least 10 years. (Pension usually starts after the age of 58.) (View Highlight)
So the maximum possible pension came out to Rs 7,500 (US$92) a month—a paltry sum, but the show was chugging along. (View Highlight)
…if you were a part of EPF in September 2014, you can choose to make your EPS contribution on the basis of your actual Basic and DA, without the Rs 15,000 pensionable salary cap. This will be with retrospective effect. (View Highlight)
What if you became a part of the EPF after September 2014? Well, no choice, no complication—the cap of Rs 15,000 holds and the 60-month period applies. (View Highlight)
On the quantitative side, this is the trade-off: an increase in the employer’s contribution to the EPS will mean a lower contribution to the EPF. (View Highlight)
A higher EPS contribution for many years can mean a tidy pension amount. But it will also mean a lower EPF corpus at retirement. The EPF corpus which, I must note, you can withdraw tax-free and then deploy in various investments as you choose to generate post-retirement income. (View Highlight)
There’s no such choice in the EPS—you will get the pension as per the calculations as long as you live. After you, your spouse will get 50% of the pension, and then, two kids will get a lower amount until they turn 25. But note that the EPS balance will not be returned to you or your family. (View Highlight)
If you plan to retire early, opting for a higher contribution to the EPS may not be a good idea. That’s because normal pension payments start at the age of 58. An earlier start from the age of 50 is allowed, but this means a much lower pension. (View Highlight)
Also, if you expect your salary levels to dip as you approach retirement, opting for a higher contribution to the EPS is not a good idea—it will reduce your pension payouts. There’s also the risk of an employee passing away soon after retirement. In this case, the higher contribution to the EPS will not pay off as expected. (View Highlight)
