Should Salaried Individuals opt for a Higher Pension Scheme from EPS?

Published: May 27, 2023 at 6:00 am

Further extension of the deadline to opt for a higher pension under the Employee Pension Scheme (EPS) has been extended to June 26, 2023. So, the subscriber of EPFO has a month to decide whether to opt for a higher pension scheme from EPS. The objective of this article is to help you determine the same.

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What is Employee Pension Scheme (EPS)? All salaried individuals contributing to EPF (Employee Provident Fund) are also a subscriber of EPS, where employees contribute 12% of their basic salary + D.A. (dearness allowance) towards the EPF. Of the employer’s 12% contribution, 8.33% goes to the Employees’ Pension Scheme (EPS) subject to the max contribution of Rs. 15,000 per annum, i.e., Rs. 1,250 p.m., and 3.67% to the EPF.

An employee can withdraw EPF entirely at retirement (agr-58) tax-free; however, EPS is paid as a monthly taxable pension. So, far expected pension from EPS was lower due to EPS contribution being capped at 15,000 p.a.; that’s why opting for a higher pension scheme may look attractive. Let’s explore.

How to opt for a higher pension in EPFO?

Employees who are members of the EPS-95 and are in service/retired after 2014 can opt for a higher pension by filing a joint option application with the regional PF commissioner before June 26, 2023.  

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    Step 1: Employees should visit the EPFO portal

    Step 2: Click on the “Pension on Higher Salary” – An online application to validate Joint Option.

    Step 3: Fill in the details and submit the form.

    The EPFO will digitally register the application and provide the receipt number to the applicant. Post that, EPFO will send it to the respective employer to verify for further processing.

    Who is eligible to receive a higher pension in EPFO?

    The following employees are eligible for a higher pension in EPFO:

    (a)Employees retired before 01-Sep-2014 

    • Who opted for a higher pension under para 11 (3) of the EPS-95.
    • For whom the EPFO rejected the option exercised under para 11(3) of the EPS-95.
    • Whose EPS contribution was above the maximum limit of Rs.5,000 or Rs.6,500.

    (b) Employees retired/working after 01/09/2014 –

    • Who were members of the EPS-95 and did not opt for a higher pension.
    • Whose pension contribution was above the maximum limit of Rs. 5,000 or Rs. 6,500.

    How to calculate EPF higher pension?

    The formula for calculating EPF higher pension is as follows: 

    Monthly pension amount = (Pensionable salary X pensionable service)/70. 

    How much can you expect pension existing via a higher pension scheme?

    Case-1: Assume “X” is 26 and started working in 2022 with basic pay of Rs. 43,000. “X” wants to retire at age 58 (year 2055), which means the total expected service year will be 33 (Age 58 – 26).

    a) With the existing EPS plan capped at an annual contribution of Rs. 15,000

    Monthly pension amount = (Pensionable salary X pensionable service)/70. 

    Expected monthly pension = (Rs. 15,000 x 33)/70 = Rs. 7,071

    b) With a higher EPS plan, what will be the pension?

    Assumption: Base salary of Rs 43,000 increased at 5% p.a.

    Average base salary in the last five years = Rs 1,95,601

    Expected monthly pension = 1,95,601X 33/70 = Rs. 92,212

    Difference: Rs. 85,141

    The difference in pension is enormous.

    Case-2: Assume “Y” is 36 and started working in 2012 with basic pay of Rs. 43,000. “Y” wants to retire at age 58 (year 2055), which means the total expected service year will be 33 (Age 58 – 26).

    As “Y” have already served ten years, there will be a shift of corpus from EPF to EPS. 

    EPFO, in the circular dated May 11, 2023, came out with the calculation methodology to figure out the amount that shall be shifted from EPF to EPS if you choose to apply for a higher pension.

    Remember, the higher pension comes at the cost of a reduced EPF corpus, payable tax-free to an employee upon retirement. 

    Per the last revealed valuation deficit in the pension fund for the year ended March 31, 2017, was Rs 15,000 crore, which is a worrying factor for me. It’s not only about getting a higher pension but also if one decides to shift a more significant chunk to EPS by option higher pension option.

    Points to consider before you opt for a higher pension under EPS

    1) Reduced pension to spouse & child: Subscribers are eligible for a full pension after the commencement of the monthly pension until they are alive. By all means, all the EPS subscribers should live longer and continue to get a full pension. However, after the subscriber’s death, the spouse receives only 50% of the retirement; after the spouse’s death, a maximum of 2 children get 25% each until they are 25.

    2) The pension depends on the last 60 months (5 years) of the base salary:

    • Your pension will be lower if you plan to take a lighter job with lesser pay close to retirement.
    • If you plan to retire early, your pension will be lower due to fewer service years, and you can only access a pension once you turn 50.

    3) No pension for early retirees: The retirement pension is available only if the employee completes ten years in the scheme. Those who don’t can withdraw their EPS contributions. 

    Is the higher pension scheme beneficial?

    It can benefit individuals close to their retirement (5 years or less) and who have accumulated large sums in other investments toward retirement corpus. The higher pension contribution will increase the monthly pension amount but reduce the EPF lump sum payable to an employee upon retirement. Also, note that the monthly pension is taxable, but the lumpsum EPF amount payable on retirement is tax-exempt. 

    Young subscribers- You have plenty of options to create your pension stream.

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