Many EPFO subscribers who retired after Sep 1st 2014, or are still in service have the incorrect impression that they will automatically be eligible for higher EPS pension. This is incorrect, as clarified by the EPFO circular issued on Feb 20th 2023.
According to point no 5 of the circular:
“5. Therefore, in compliance of the Hon’ble Supreme Court judgement dated 04.11.2022, following employees with their employers may submit joint option under para 11(3) and 11(4) to the concerned Regional Office:
i. The employees and employers who had contributed under paragraph 26(6) of EPF Scheme on salary exceeding the prevalent wage ceiling of Rs 5000/- or 6500/-; and
ii. did not exercise joint option under the proviso to Para 11(3) of the pre- amendment scheme (since deleted) while being members of EPS,95; and
iii. were members prior to 01.09.2014 and continued to be a member on or after 01.09.2014.”
It must be understood that (i), (ii), and (iii) should be satisfied for an employee to be eligible for higher pension.
The key conditions are (i), “The employees and employers who had contributed under paragraph 26(6) of EPF Scheme on salary exceeding the prevalent wage ceiling of Rs 5000/- or 6500/-” and (ii), “did not exercise joint option under the proviso to Para 11(3) of the pre- amendment scheme (since deleted) while being members of EPS,95”.
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Therefore only a small subset of those part of EPFO before Sep 1st 2014, would qualify as per this condition. At the time of writing (24th Feb 2023, 16:00 hours), there is still no clarity on the amount of pension eligible subscribers would get.
Those who opt for higher pension will have to lose a sizeable chunk of their EPF corpus (contributions plus interest) to get this pension. We have already recommended that this is undesirable unless the subscriber belongs to the low income tax slabs. See: Should I opt for higher EPS pension by contributing a lump sum?
This is a summary of the article:
- A substantial sum of several lakhs needs to be paid from the EPF to the EPS to avail higher pension. This will interrupt the compounding of the EPF corpus for those who still have a few years of service left.
- Suppose you pay the lump sum and opt for a higher EPS pension, estimate what it would be at the time of retirement.
- Instead, if you let that money compound in EPF and use it to purchase a government bond via RBI Retail Direct upon retirement, how much would the interest payout be? For example, I used RBI Retail Direct to buy government bonds and create an income source.
- Suppose the RBI bond payout is not much different from the EPS pension. In that case, the RBI bond is the superior option because the bonds can be held jointly with your spouse in either or survivor mode, and the same interest payout will continue for the lifetime of both holders, and the money will go to heirs.
- Contrast this with the EPS pension, where the corpus cannot be recovered; worse, the payout to the surviving spouse will drop by 50% upon the subscriber’s demise.
- Not opting for the enhanced EPS pension has another advantage. There is extra liquidity to opt for a pension at a later age. Insurance annuity payouts after 70 are often more lucrative than government bond coupon rates. See: I need a pension: Should I buy an annuity or a govt bond?
It is unfair to expect subscribers to opt for higher EPS pension by March 3rd 2023, when the exact pension calculation has still not been communicated by the EPFO. It is quite likely that this deadline will be extended.
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