Salaried employees, including those in the private sector, recently had reasons to rejoice after a Supreme Court order to EPFO to change an old pension rule. The apex court order mandated that EPFO give full pension to all EPS subscribers.
That means all retiring employees can now draw pension on the basis of actual salary, and not on the basis of the earlier Rs 15,000/month cap on pension contributions.
Following this order, pension payouts are likely to rise manifold.
But the question that arises is: how will you get the higher pension and how much actual gain will it translate into?
Also, if you opt for shifting a part of your PF corpus to your EPS retrospectively, how will the new math play out for you?
How to get more pension
You will have to shift a significant chunk of your provident fund balance to your EPS account. So, if you want higher pension, you will have to submit an application via your employer to the EFPO to deduct a sum retrospectively equal to 8.33% of your basic+DA towards the EPS and shift the extra amount from the PF account to the EPS retrospectively.
But will this shift really benefit you, since a portion of your interest-earning PF will be shifted to EPS?
Here’s the math: Considering you start working at a salary (basic + DA) of Rs 10,000 per month in 1999-2000 and got a 10% hike every year, your current salary would be Rs 61,159 today. If your retire today after 20 years of service, under the revised formula you will get a pension of Rs 17,474 per month. This amount is 300% more than the Rs 4,285 you would have got under the existing rules that caps computation of pension contribution at a maximum of Rs 15,000 per month.
But there is a catch. To get the amount stated in the example above, you’d need to divert an additional Rs 8 lakh (Rs 4 lakh principle + Rs 4 lakh interest on 20 years of contribution) from your PF to your EPS over the 20 years of your service.
If you used this additional Rs 8 lakh to buy an annuity from a life insurer like LIC at a 6% rate, you would get a pension of around Rs 6,000. Adding Rs 6,000 LIC pension and pre-revised pension of Rs 4,285 would give you a figure around Rs 10,285 per month, which is much less than Rs 17,474 you would get if you shifted money from PF to EPS.
Annual salary: 6 lakh (basic + DA alone)
5% hike every year for 20 years of service
Total contribution of 20 years based on earlier EPS contribution fixed at 15,000 a year = 3 Lakh ; Monthly pension: Rs 4,717
Total EPS contribution based on revised EPS contribution on full salary for 20 years = 16.52 Lakh; Monthly Pension: Rs 36,089
Now, if you don’t shift the PF contribution to EPS and assume that your PF fund would have received an interest rate of 8% return, then upon retirement, you would get Rs 28.7 lakh.
And if you take this Rs 28.7 lakh and buy an annuity from a life insurer like LIC at 6% rate, you will get a pension of Rs 14,354.
By this arithmatic, Rs 14,354 LIC pension + Rs 4,717 pre-revised EPS pension is still less than Rs 36,089 pension you will get according to the revised formula after the SC order.
How pension is calculated:
The formula for calculation of your pension is:
Pension per month = Number of years of your service X Last drawn Basic salary
The calculation will keep changing with change in number of years of your service and your salary. So, for example, if your retirement basic salary is Rs 1,00,000 and you served for 30 years. You will get a pension of
Rs 45,714*, which would be over 900% more than the existing pension of 4,525 per month.
*(The calculation includes 2 years of bonus years one gets after completion of 20 years of EPS contribution
1,00,00 X 30+2/70 = Rs 45,714 )
History of EPS
India had introduced the Employees Pension Scheme (EPS) in 1995, under which an employer was supposed to contribute 8.33% of the employee’s salary in a pension scheme. However, the contribution was capped at 8.33% of Rs 6,500 (or Rs 541 per month). In March 1996, the government amended the act and allowed the contribution to be a percentage of the actual salary, provided the employee and employer had no objection.
On September 1, 2014, the EPFO amended the act to increase the contribution to 8.33% of a maximum of Rs 15,000 (or Rs 1,250). The amendment also stipulated that in case of those who availed of the benefit of pension on full salary, their pensionable salary would be calculated as the average of the last five years’ monthly salary, and not of the last one year of average salary, as per earlier norms. This reduced the pension of many employees.
On April 1, the Supreme Court of India upheld the Kerala High Court verdict on monthly pension from the Employees’ Pension Scheme 95. The cap of Rs 15,000 on the basic salary was removed by the Kerala High Court.