Do not increase EPS Contributions for higher Pension! It may mess up your retirement!

The employee pension scheme (EPS) is a component of the employee provident fund that provides a pension to its subscribers. Yesterday, news about how Mr. Praveen Kohli got a 1200% hike in pension created a stir. This was because, in October 2016, the Supreme Court directed the EPFO to increase the pension of 12 petitioners as per a 1996 amendment that should have increased their EPS contributions. In this post, I discuss what this increase in EPS contribution is all about and why you should not increase EPS contribution in the hope of getting higher pension during retirement. It will affect your ability to handle inflation in expenses.

How is this increase in EPS contribution possible?

As we know, the EPF deductions have a wage ceiling = 15,000 (basic + DA). That is only up to a maximum of 12% of 15,000 will go towards EPF from the employees’ contribution. The employers’ contribution has two components: 8.33% of the wage ceiling (or lower) will go towards the EPS and rest to EPF. The EPS corpus will be retained by the EPFO to provide a pension after retirement.

The EPS rules were framed in Nov 1995 and a clause added in March 1996 that an employee can contribute up to  8.33% of actual basic +DA to EPS for pension and not just up to the wage ceiling. Reference: Hon’ble Supreme Court’s Order in SLP No.33032-33033 of 2015

However, this possibility to increase the EPS contribution is only applicable to EPF accounts opened Sep 1st 2014 – after that, the wage ceiling will apply to EPS.

In a nutshell, the usual EPS contribution is 8.33% of wage ceiling (currently basic + DA = 15,000).

Subscribers who joined the EPF before Sep. 1st 2014 can increase the EPS contribution to:

8.33% of actual basic +DA (so if your basic + DA is higher than the wage ceiling, more money will be deducted towards the EPS).

In 2005 when the EPFO was approached to implement the higher EPS contribution it refused, leading in a long court battle that was settled in Oct 2016. The increased pension was first received in Nov 2017 and hence the new article about the 1200% hike.

Increase in EPS Contribution: No free lunch

Take the case of Mr. Praveen Kohli. In order to receive 13.23 Lakh extra pension in the last four years since retirement (say 2013 for argument), he had to pay 15.37 lakh as extra EPS contribution.

In his case, it was paid later, but suppose an employee had opted for higher EPS contribution in 2005*, then that 15.37 lakh would have been paid as EPS contributions over the next 8 years (until 2013). Had this amount gone to the EPF/PPF, it would have been a fine investment, earning a minimum** of 8.25% and a corpus of 21.8 Lakh. However, the amount went into the EPS which does not result in a corpus  (to the employee, that is)

* The first representation to increase EPS contribution was only in 2005 even though it was possible from Mar 1996.

** The EPF rate was 8.5% for most of this period, even going up to 9.5% in a 2010-11

My point is, suppose your EPF account was opened before Sep 1st 2014 and you have about 15 years or so to retirement, would you increase your EPS contribution to get a higher pension or would you invest it right so that you have access to the entire corpus?

I am not talking about equity investment here (although that would be an obvious choice), even an investment in the EPF (via VPF) or PPF would get a nice fat corpus (in spite of falling interest rates).

Two aspects are key for retirement:

  1. A large enough corpus that will allow us to diversify investments in buckets of varying risk (from zero to say, medium). You can use the freefincal robo advisory template to punch in your numbers and see how this works.
  2. Minimise pension income or interest income as much as possible. This is because they are taxed as per slab. This is possible only if we have a corpus to play with. Then one can take advantage of partial withdrawals from mutual funds (debt or equity) as they are capitals gains instruments.

To regular readers of freefincal, this is like preaching to the choir. They would know increasing EPS contributions is not beneficial. If you are a new reader, then I would urge you to spend some time with the robo advisory template or with the low-stress retirement calculator. There is an android app for this or an online version.

Recognise the need for “income” after retirement to increase at the rate of at least 6% a year, preferably 8%. Only then the limitations of a constant pension from EPS will become clear.

Even if a pension received = last drawn pay, it is not sufficient

increase in EPS contributions will not help you beat inflation in retirment

Even with the increase in EPS contributions, the pension will only be about half the last drawn pay. So:

increase in EPS contribution will not result in a pension higher the half the last drawn pay

These are pictures taken from the Retirement Planning: A Slide Show that I use in the DIY investor workshops or at corporate seminars.

Can I increase EPS contribution if I am going to retire shortly?

Suppose you are going to retire in a few years (say 5-6), you can increase your EPS contribution if you do not have enough corpus to provide an inflation-protected incomeThis way, you will get a higher EPS pension and you can buy an annuity from the rest of your retirement benefits. You can find this out with the freefincal robo template or you can consult a SEBI registered investment advisor from my list.

If you have enough corpus to retire comfortably (or will have at the time of retirement), do not increase EPS contributions.

Update: I have now done a detailed analysis here: Revised EPS Pension Calculator: How much will my EPS Pension increase? There is no need to increase EPS contribution if your retirement is far away. You can (if you wish) increase it in the last few years (5 or less)and get the higher pension without wasting money on EPS contributions.

Can I increase EPS contributions retrospectively?

No. The petitioners who won the verdict against EPFO requested an increase in EPS contribution in 2005, but was denied*. So they would get the benefits from that date only and not before.

If you apply for an increase in EPS contribution (provided your EPF account was opened before Sep 1st 2014), you will get the increased contribution only from the date of application.

* The EPFO said they should have applied within 6 months of the 1996 amendment which was overturned by the court.

Note: I am a NPS subscriber. So have only a basic understanding of EPF. Let me know if I have missed any point or mis-read any.

References

1:  EPS 1995-Benefit of actual salary exceeding wage limit as per Supreme Court Judgment

2: SC ruling enables massive rise in private sector pensions

3: Other sources are linked within the post.


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24 thoughts on “Do not increase EPS Contributions for higher Pension! It may mess up your retirement!

  1. Hi
    Just want to know if for a person like me who has retired two years back ,paying back the increased contribution with interest (like Mr Kolhi) and getting higher pension ,is a good option ?
    Regards
    Sam

    1. How can you do this?!! Mr. Khohli applied while in service so got an increase in pension when the legal hassles were cleared. Only those in service and with accts opened before Sep. 1st 2014 can apply. Even for them it is a bad idea.

  2. Hi Subra sir,
    Nice analysis. It was a sensational news yesterday for me. But when I analyzed further noticed that the higher pension scenario is applicable to govt employees only 🙁

    For private org employees, it is by formula (wage_limit * exp_years) / 70 and it is capped by maximum 7500 per month.

    If this is accurate, please put a BIG disclaimer in the article, so that private employees aware of this 🙂

    Thanks.

  3. (1) An employee’s basic salary (basic+DA) is Rs. 10,000. He contributes 100% of the basic to EPF (including VPF).
    (2) The employer contributes 12% of the basic, which equals to 1,200. Out of this contribution, Rs. 833 goes to EPS.
    (3) The employee has been a member of EPFO much before 1st September 2014.

    Kindly explain how he could increase his contribution to EPS and by what amount. Thanks.

  4. Exactly. I’m stuck with EPS contribution. If I have option to withdraw or even atleast stop it, I would do so even at the price of loss of all the contributions to EPS I made till now. 🙂

  5. The Statement in the beginning of this article regarding “Do not increase EPS Contributions for higher Pension! It may mess up your retirement!” about wage sealing on EPF deduction at 15000 is wrong. For EPF deduction it is on full wage (Basic + DA) at applicable % which is 12% now. The wage sealing is only for computing EPS contribution.
    Whether you opt for higher EPS contribution as per 1996 amendment or not, EPF deduction will be done at 12% of full wage and the same will be dispersed at the time of retirement. Only the EPS contribution will not be dispersed as total amount but pension will be paid. Now the assumption of repaying from hand for increase in EPS contribution is itself wrong. Only from EPF account additional EPS contribution will be transferred and you will get less EPF accumulation at the time of retirement and higher monthly pension for the additional EPS contribution left with EPFO. At any case the difference of current wage sealing EPS contribution to increased full wage EPS contribution will be the amount what one will get as EPF accumulation at the time of retirement. Any investment option of this difference in this accumulation will not be available as government already locked the option of withdrawal of EPF amount even during employment change over. Only for certain specific reason like marriage etc the withdrawal of employees contribution is allowed partially

    1. Yes, I thought about this when I wrote that. However, the rules clearly state that the EPF also has the ceiling. See the linked document. In practice, few people have echoed your point and few have told me the ceiling is applied to them!!

  6. Thank you freefincal.com for sharing your thoughts/views about increasing EPS contributions for higher pension. However, I am not sure if you did consider the increased pension benefits that the family members (widow/widower pension and children pension) would receive upon the death of the EPF member? An increase in pension benefit due to increase in pension contribution would ensure that the family members get higher pension upon the member’s death. Although it may not be significantly higher, it would be relatively high and every penny would help. As we all know, no one gets money for free. Also, your point that the option to increase EPS contribution cannot be made with retrospective effect isn’t correct (as I understand it) as the supreme court has ruled that member can elect to increase the EPS contribution any time (possibly, even after retirement?). Also, it would make more sense for the EPF authority to actually increase the contribution with retrospective effect as it would mean that they could ask the member to pay the difference amount that they would have contributed had they made contributions calculated using the higher basic salary rather than the ceiling of Rs. 6,500 or Rs. 15,000. Otherwise, if would be unfair to expect the EPF to pay higher pension benefit even for those years when the EPS contribution was made based on the basic salary ceiling. Therefore, I wouldn’t be surprised if the EPF asks all the members who opt to increase their EPS contributions based on the higher/actual basic salary to make the election with retrospective effect and ask them to pay the difference together with interest that would have been paid on such difference amount (or, transfer the necessary balance from EPF corpus to EPS corpus?). Your take that increasing the EPS contribution wouldn’t be a good option for most people isn’t justified as you haven’t considered all the aspects such as growth of the EPF corpus Vs what one would receive as benefit by opting to increase the EPS contribution. You mention about the need to have a corpus and mentioned mutual funds as an example. However, the amount that is contributed to EPF is locked and the EPF members can’t use most part of the EPF fund until retirement or close to their retirement age except for some exceptional cases when they could make part withdrawals. Also, it is possible that some of the members would opt to or would be forced to (due to introduction of new technology or because their jobs have become redundant, etc.,) switch to low paying jobs after a certain age and naturally their basic salary could be lower than what they were earning earlier. As the pension benefit receivable by a member is directly proportional to the last drawn average basic salary + DA, one should constantly be aware of the rules and if needed and if possible, opt out of EPF by requesting the employer to not make EPF contributions. Although, this might decrease the years of pensionable service, it is possible that the pension receivable calculated using the old average basic pay and pensionable service could be higher. Therefore, the decision as to whether to increase the EPS contribution in order to receive higher pension benefit should be considered on a case by case basis and there are a lot of other factors that one should consider before arriving at a decision such as family’s overall financial wealth, family earnings, average salary one expects to receive during the five years before retirement, etc., and the decision is not as easy as one would think. It is important that the EPF members are keeping themselves updated about the various changes/amendments that are made to the EPF and EPS rules and consider both short term and long term financial goals.

    1. Why assume those who do not opt for higher pension will not provide for their dependents after death?!

      If you had bothered to read the post, you may have noticed that I have provided ways and means to decide on a case by case basis.

  7. Great Article, thanks !!! I was wondering what it meant for me and should I opt for the increase in EPS contribution. Now, after reading this it is crystal clear. Thanks a lot for a timely article !!

  8. There seems to a conflict on a particular important aspect. I would be grateful for clarification – If a person has retired/resigned, is he eligible for a higher pension as per the new ruling by paying the difference to the EPS account? i have resigned 2 months back at the age of 57 years 10 months and am now 58 but as yet have not applied for pension or release of corpus.
    Is a higher contribution as arrears beneficial in my case?

  9. Thank you for the clarification, in my case I have not yet applied for pension or withdrawal of Corpus, will I still be considered as not being part of the EPS? I was an employee and had contributed as on the date of the court ruling.

    1. Unless you had contributed 8.33% of full basic + da to EPS (not 8.33% of ceiling salary), you are not eligible as of now unless EPFO allows this in future.

  10. May clarify following points please .
    1-Do you mean to say new employees appointed on or after 01/09/2014 are deprived of EPS Scheme if their Salary is more than Statutory Ceiling limit Rs 15,000/- ?

    2- Such a EPF members employeer not even entitled to contribute 8.33% towards Employees Pension Funds (employers equal 12% share on salary )from on Statutory Ceiling Amount Rs’ 15,000)- ?

    3- Do you mean to say 12% Employees and equal 12% of employees share would be deposited in employees EPF account managed either by EPFO (Un Exempted ) or managed by Employees Establishments Trust (Exempted) ?

    4-What is status of employees who are continuing after 01/09/2014 and retired retiring after this date are eligible for higher Pension ? Since its learnt that EPFO is reluctant o extend this higher pension benefits to those retired or retiring after 01/09/2014 allowing higher pension benefit only those retired before 31/08/2014 as per Hon SC Judgement dated 4/10/2016

    5- What about 5 years Average to those retired after 01/09/2014 .

    6- It is learnt that EPFO is allowing other pension benefit after 01/09/2014 only to those Petitioners ho won the case in Hon HC of south parts .
    Isn’t it ?

    7- Why EPFO is reluctant to extent interest benefits on the EPS arrears too especially EPFO has changed up to interst on differential amount and demand raised to this effect .

    8-Don’t you think that EPFO should ensure claiming and paing interst on both payments and claiming on Receivable by EPFO and on EPS arrers payable by EPFO to EPS Pensioner ?

    9- More over don’t you think that the nett differential amount to be claimed or returned ,deposited in EPS Pensioner account since Shri Praveen Kohli required to deposit DD for around Rs 15 lacs on dated 20/09/2017 in advance which EPFO took 1 month and 10 days and deposited arrears around Rs 12.35 lacs with depoaiting revised EPS Pension Rs 30,592/- on Nov 1 .
    Are you sure benefit of deferred pension @4 % per year up to 60 years 8.16% only benefit is given especially when he claimed Form 10 D and 19 after his regular uperannuation at the age of 60 years ?

    10-Don’t you think that EPFO should extend this benefit while computing final Pension ?
    11- Don’t you think thank EPS 95 Pensioners submit differential amount DD (I fact it must be only with Book Adjustment ) in advance in full amount and without any interest on it for a month and 10 days total 40 days interst loosing ?
    Who will or should bear the interst loss ?

    May offer your expert opinion

    Thanks n Regards
    RD Pathak
    Sr DGM (Plant Operation ) MP State Coop Dairy Federation Bhopal Superannuated from unit Indore on 30/06/2011@ 60 years age .

    1. 1-Do you mean to say new employees appointed on or after 01/09/2014 are deprived of EPS Scheme if their Salary is more than Statutory Ceiling limit Rs 15,000/- ? ==> Not deprived. They are saved from the EPS!

      2- Such a EPF members employeer not even entitled to contribute 8.33% towards Employees Pension Funds (employers equal 12% share on salary )from on Statutory Ceiling Amount Rs’ 15,000)- ? ==> YEs. That is what the above means! For them, only EPF (12% + 12%).

      3- Do you mean to say 12% Employees and equal 12% of employees share would be deposited in employees EPF account managed either by EPFO (Un Exempted ) or managed by Employees Establishments Trust (Exempted) ? ===> I dont know the rules for trusts not part of EPFO.

      4-What is status of employees who are continuing after 01/09/2014 and retired retiring after this date are eligible for higher Pension ? Since its learnt that EPFO is reluctant o extend this higher pension benefits to those retired or retiring after 01/09/2014 allowing higher pension benefit only those retired before 31/08/2014 as per Hon SC Judgement dated 4/10/2016 ==> Those who have retired are not part of EPS. The EPFO would be plumb crazy to accept such requests.

      5- What about 5 years Average to those retired after 01/09/2014. ===> It will still apply.

      6- It is learnt that EPFO is allowing other pension benefit after 01/09/2014 only to those Petitioners ho won the case in Hon HC of south parts .
      Isn’t it ? ==> I dont know and I have no idea what you are trying to say.

      7- Why EPFO is reluctant to extent interest benefits on the EPS arrears too especially EPFO has changed up to interst on differential amount and demand raised to this effect . ==> YOu will have to ask them

      8-Don’t you think that EPFO should ensure claiming and paying interst on both payments and claiming on Receivable by EPFO and on EPS arrers payable by EPFO to EPS Pensioner ? => No comment.

      9- More over don’t you think that the nett differential amount to be claimed or returned ,deposited in EPS Pensioner account since Shri Praveen Kohli required to deposit DD for around Rs 15 lacs on dated 20/09/2017 in advance which EPFO took 1 month and 10 days and deposited arrears around Rs 12.35 lacs with depoaiting revised EPS Pension Rs 30,592/- on Nov 1 .
      Are you sure benefit of deferred pension @4 % per year up to 60 years 8.16% only benefit is given especially when he claimed Form 10 D and 19 after his regular uperannuation at the age of 60 years ? ==> No idea.

      10-Don’t you think that EPFO should extend this benefit while computing final Pension ? ===> No comment
      11- Don’t you think thank EPS 95 Pensioners submit differential amount DD (I fact it must be only with Book Adjustment ) in advance in full amount and without any interest on it for a month and 10 days total 40 days interst loosing ?
      Who will or should bear the interst loss ? ===> No comment.

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