Is opting for higher pension in EPS beneficial to employees?

The union labour ministry has said that the deadline for opting for higher pension for member of Employees Pension Scheme (EPS) 1995 who retired before September 1, 2014, was supposed to end by 3rd March 2023 has been extended to 3rd May 2023. This scheme was also applicable for those employees who were in service prior to 1st September 2014 and continued to be in service on or after that said date but were unable to exercise the joint option under the EPS can do so before the new deadline.

In compliance to the Supreme Court (SC) judgement, a new circular was issue and the following employees with their employers may submit joint option under para 11(3) and 11(4) to the concerned regional office:

Those employees and employers who had contributed under paragraph 26(6) of the EPF scheme on salary exceeding the prevalent wage ceiling of Rs 5,000 and Rs 6,500 but didn’t exercise the joint option under the proviso to para 11(3) of the amended scheme (since dated) while being members of EPF 1995 and were members prior to 1st September 2014 also continued to be a member on or after 1st Sept 2014.

In simple terms, the SC order allows employees who were existing in EPS 95 members as on 1st Sept 2014, can contribute up to 8.33 per cent of their actual salaries, as against 8.33 per cent of the pensionable salary capped at Rs 15,000 a month, towards pension. It also had struck the requirement in the 2014 amendment mandating employer contribution of 1.16 per month of the salary exceeding Rs 15,000 per month. This thus provides for a higher pension for these EPS subscribers. Only 8,000 members have opted for this till March 3, 2023 for which the SC order was given on November 4, 2022.

The EPS 95 allows for a guaranteed pension for the subscribers with an option to start the pension from age 58 or 60. This pension is available for the subscriber as long they live and 50 per cent of the amount to the surviving spouse post that. The pension also covers the surviving children if the deceased member falling within the definition, they shall also be entitled to monthly pension in addition to widower pension. The pension in that case is equal to 25 per cent of the widow/er pension to each of the child subject to maximum of two children till the age of 25 years.

The maximum pension under this is Rs 7,500 and Rs 1,000 per month. Out of the employer’s monthly contribution of PF of 12 per cent, an amount of 8.33 per cent goes towards EPS and the rest to EPF. For instance, if an employee’s salary (i.e., Basic + Dearness Allowance) of Rs 100,000 per month and employer contribution to PF is 12 per cent then Rs 1250 (8.33% of 15000) will go to EPS and the rest of the amount Rs 10750 will go to the EPF as employer contribution.

The announcement of higher pension has led to confusion in the EPFO subscribers as to whether one should opt for this or not. There are some compelling advantages for opting for this higher pension while equally debilitating reasons to not consider. Calculations show that a person drawing an average salary (basic + DA) in the last 5 years could get a monthly pension of about Rs 20,000 and may go up to Rs 50,000 for those about a 5-yr average salary of Rs 100,000.

Any individual considering a guaranteed income would find comfort in this option as the inflows would be consistent and constant irrespective of the market fluctuations. In the age of investment instruments increasingly linked to market vagaries, this gives a whiff of surety, comparing even with National Pension Scheme (NPS). Even when one creates a larger corpus to enjoy a comfortable retirement, one needs to worry about managing that corpus post-retirement i.e., during the distribution phase to ensure the required inflows are achieved. Despite this enticing feature, the lack of return of corpus in the event of demise of the subscriber is a big turn off. The inaccessibility of the remaining corpus impedes the surviving family due to the limit of 50 per cent of the eligible pension. At the end, it’s their own corpus.

Higher pension is beneficial for those looking for higher monthly inflows than a lumpsum at once and it achieves a welfare measure as pension continues beyond the death of the subscriber, to their family, albeit at a lower quantum. Of course, the scheme lacks flexibility where the contribution to the pension is fixed and can’t be increased even if one wishes to do. Also, for those opting to retire early, this can’t be a viable option.

(The author is a co-founder of “Wealocity” and can be reached at [email protected])