How do I secure a regular monthly income after retirement? That’s a vexing financial problem that most Indians of our generation face, after the phasing out of guaranteed pension from the Government. But one guaranteed option that remains and usually flies under the radar, is the Employees’ Pension Scheme 1995. This scheme can help employees with long years of service receive a modest but guaranteed pension throughout their retired life.
Enrolment
All organised sector employees in India who are enrolled with the Employees Provident Fund Organisation (EPFO) automatically become members of the Employees’ Pension Scheme (EPS) as well. Once you enrol in the EPF, your employer deducts 12% of your basic pay plus dearness allowance every month towards your retirement corpus, with your employer making a matching contribution.
While your 12% contribution goes entirely into the EPF account which gives you a lump sum on retirement, 8.33% of your employer’s contribution goes into the EPS to fund your pension payouts post-retirement. The government also adds 1.16% of your pay to the EPS kitty every month.
However, both the employer’s and the government’s EPS contribution on your behalf are subject to a pay cap. The maximum pay on which the EPS used to accept employers’ contributions used to be ₹6,500 per month until September 2014. In a sweeping amendment to the EPS rules in September 2014, this pay cap was revised upwards to ₹15,000 per month. This effectively means that whatever your pay, the money flowing into the EPS kitty every month on your behalf is capped at ₹1,250 per month (8.33% of ₹15,000).
The September 2014 amendment made another critical change as well. It decreed that new employees who enrolled with the EPFO from that month, who earned a basic pay plus DA of over ₹15,000 per month, would not be eligible for EPS benefits. So if you’ve joined the workforce only in the last five years, you are likely to be enrolled only in the EPF and not EPS. This may change after a recent Supreme Court ruling as we’ll see later in this article.
Eligibility
Under the EPF, the government credits interest at a specified rate on your accumulated balance at the end of each financial year. At the time of retirement, your maturity amount from the EPF will be equal to the contributions made by you and your employer plus the annual interest earned. In contrast, there is no annual interest credit to your EPS account. If you have been a regular contributor, the government simply promises to pay a fixed monthly pension to you after retirement.
Pension payouts under EPS are only available for employees who have put in a minimum 10 years of service with an organisation that offers EPF benefits (doesn’t matter if you’ve jumped jobs). If you choose to quit all employment without completing 10 years of service, you are not eligible to receive any pension and you can apply to withdraw your accumulated EPS contributions.
When you switch jobs and transfer your EPF account from one organisation to another, your old organisation is expected to provide a Scheme Certificate detailing your length of service, pay, non-contributing period and so on.
The PF Commissioner records this information over the years to compute your final pension payout. Don’t worry if your online accounts statement from the EPFO does not reflect your EPS balance; it only needs to capture your service details for you to get pension benefits.
What you get
Under the EPS, the government promises to pay you a monthly pension calculated using a specified formula from the age of 58 until your death. Though you can opt for early pension from the age of 50, this requires a steep sacrifice on the amount of monthly pension. The monthly pension payable to you is calculated based on the formula — pensionable salary multiplied by pensionable service divided by 70.
Pensionable salary, for the purpose of this calculation, is your monthly basic pay plus DA averaged over the last 60 months of your service. (This was 12 months before the September 2014 amendment). The pensionable salary is, however, subject to a ₹15,000 per month cap. Pensionable service is the number of years you have been employed until you retire, with the number capped at 35 years. For determining it, periods of over six months are rounded off to one year and those less than six months are ignored. To illustrate, if your basic pay plus DA averaged ₹40,000 a month in the 60 months before retirement and you retire at 58 after working for a total of 20 years and five months, your monthly pension will amount to ₹4,285 per month (₹15,000*20/70).
Court ruling
As you can gauge from the above example, the monthly cap on pensionable salary leads to a very modest pension payout from the scheme. In October 2018, the Kerala High Court, in response to a petition, struck down the amendments to the EPS made in September 2014. This judgment was upheld by the Supreme Court in April 2019.
This judgment is expected to affect subscribers in three ways. One, employees who joined service after September 2014 and are now contributing to EPF alone, may become eligible for EPS benefits that were so far barred to them. Two, if the salary cap of ₹15,000 on EPS contributions and pensionable salary goes, employees may be able to bump up their pension by asking their employer to contribute a higher sum to the EPS, rather than EPF. Three, they may also get a higher pension because the pensionable salary will then be based on the last 12 months’ average pay rather than the last 60 months.
While all this is good news for employees, they mustn’t count their chickens before they hatch.
The SC ruling is yet to be given effect as the EPFO is unsure how it can implement them. As things stand, the fund may be unable to meet a sudden spike in pension demands from many of its subscribers. The EPFO is reportedly planning to seek a review of this decision.
