Salaried employees, including the private sector workers, got a big boost from the Supreme Court recently as the apex court ordered the EPFO to give full pension to all retiring employees on the basis of actual salary rather than capping the computation of the pension contribution at a maximum of Rs 15,000 per month.
The pension payout after the order is likely to rise many fold after the order. But the question is how will you get the higher pension, how much will you gain from the new pension and whether the new pension would be beneficial for you considering you will have to shift a significant portion of your provident fund corpus to EPS retrospectively.
How to get enhanced pension:
To get higher pension, you will have to shift a significant chunk from 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.
Now the question arises, whether this shifting would be beneficial for you since a portion of your interest earning PF will be shifted to EPS. 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 and if your retire today with 20 years of service, under the revised formula you will get a pension of Rs 17,474 per month. This is 300% more than the Rs 4,285 you would have got under the existing rules that cap computation of the pension contribution at a maximum of Rs 15,000 per month.
But, taking the above example, to achieve that you need to divert additional contribution for the last 20 years in your PF to your EPS account of around Rs 8 lakh (Rs 4 lakh principle + Rs 4 lakh interest on 20 years contribution).
How is the pension 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 45,174, which would be over 900% more than the existing pension of 4,525 per month.
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 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 calculation, 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.
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.
Source : Economic Times