- Date : 06/06/2020
- Read: 4 mins
What does EPS mean? What are its various rules and provisions? What are the eligibility and withdrawal criteria? Read on for answers.
The Employee Pension Scheme (EPS) was introduced in 1995, to ensure that employees in the private sector are able to earn a fixed income even after retirement. Though EPS is part of the Provident Fund Scheme and applicable for private organisations, it can also be availed of by public sector undertakings and semi-government organisations. It is different from the National Pension Scheme, which is an alternative retirement scheme promoted by the government.
Related: Retirement planning for pros: National Pension Scheme
Let us find out more about the various aspects of EPS.
1. Background – EPS as we know it was introduced in 1995. Its predecessor was the Family Pension Scheme, which required a contribution of 3.34% and was not available during the lifetime of the scheme member. Because of the low contribution, the pension amount was low and was available to the surviving family upon the death of the member employee.
2. Applicability – EPS is mandatory for private organisations with more than 20 employees. It is optional for private organisations with less than 20 employees and for public and semi-government organisations.
Related: Types of pension plans and their tax benefits
3. Contribution – Domestic employees with monthly wages (basic, DA, conveyance allowance and special allowance) of less than Rs 15000 per month must mandatorily contribute 12% of their wages (basic salary and DA) to the PF account, out of which 8.33% will be contributed towards EPS and remaining 3.67% towards EPF. This is only applicable to the employer’s contribution to PF; the entire 12% of the employee’s contribution goes to EPF only. However, if their monthly wages exceed Rs 6500, the contribution towards EPS is restricted to 8.33% of 6500.
4. Return – The return on your pension contribution is calculated using the formula: Monthly Pension = (Pensionable Salary X Pensionable Service)/70. Here, 'pensionable salary' is your average monthly salary during the last year of your service. Assuming that you had 30 years of service and your pensionable salary was Rs 6500, your monthly pension will be Rs 2786.
5. Eligibility – An employee is eligible for pension if he or she has served for more than 10 years and has retired upon reaching 58 years of age. However, an employee is also eligible for a reduced pension after the age of 50, provided he or she is no longer in service.
6. Withdrawal – Pension can be withdrawn prematurely, but the employee must have served for at least 10 years. The benefit withdrawn is not calculated on the basis of the rate of interest but rather on the basis of a fixed table designed specifically for the purpose.
7. Taxability – Though the contributions made towards EPS are tax-free, the pension received later would be taxable.
Related: Tax Benefits after Retirement
8. Interest – The interest rate for EPF and EPS is decided by the central government in consultation with the Central Board of Trustees. There is an EPF rate notification issued every year, and it was 8.55% for the financial year 2017-18.
9. Government role – The government contributes 1.16% of the basic pay towards the employee’s pension. This scheme is backed by the government, so it is a fully secure form of investment. The remaining contribution is made by the employer. The pension amount receivable is known beforehand, so it is a very transparent investment as well.
10. Death and disability – If the pensioner expires, the pension becomes payable to the spouse. However, the widow/widower will get only a reduced pension. A family pension is given to up to two children until they reach the age of 25. A child with a permanent disability gets a pension for the rest of their life. In case the expired pensioner was unmarried, the pension is paid to the nominee.
Related: Alternative sources of income if you don’t have a pension
The Supreme Court recently approved an increase in the pension scheme by doing away with the capping on contribution. However, as the pension will increase, the provident fund corpus will be reduced as the extra contribution will go towards EPF instead of PF.
To conclude, EPS provides much-needed financial security to that section of India’s workforce who earn a lower income and who work with private organisations. These employees often don’t have much money saved at the end of the month, nor do they have the welfare benefits available to public sector employees. Thus, with little planning, you can live a comfortable life after retirement.
The Employee Pension Scheme (EPS) was introduced in 1995, to ensure that employees in the private sector are able to earn a fixed income even after retirement. Though EPS is part of the Provident Fund Scheme and applicable for private organisations, it can also be availed of by public sector undertakings and semi-government organisations. It is different from the National Pension Scheme, which is an alternative retirement scheme promoted by the government.
Related: Retirement planning for pros: National Pension Scheme
Let us find out more about the various aspects of EPS.
1. Background – EPS as we know it was introduced in 1995. Its predecessor was the Family Pension Scheme, which required a contribution of 3.34% and was not available during the lifetime of the scheme member. Because of the low contribution, the pension amount was low and was available to the surviving family upon the death of the member employee.
2. Applicability – EPS is mandatory for private organisations with more than 20 employees. It is optional for private organisations with less than 20 employees and for public and semi-government organisations.
Related: Types of pension plans and their tax benefits
3. Contribution – Domestic employees with monthly wages (basic, DA, conveyance allowance and special allowance) of less than Rs 15000 per month must mandatorily contribute 12% of their wages (basic salary and DA) to the PF account, out of which 8.33% will be contributed towards EPS and remaining 3.67% towards EPF. This is only applicable to the employer’s contribution to PF; the entire 12% of the employee’s contribution goes to EPF only. However, if their monthly wages exceed Rs 6500, the contribution towards EPS is restricted to 8.33% of 6500.
4. Return – The return on your pension contribution is calculated using the formula: Monthly Pension = (Pensionable Salary X Pensionable Service)/70. Here, 'pensionable salary' is your average monthly salary during the last year of your service. Assuming that you had 30 years of service and your pensionable salary was Rs 6500, your monthly pension will be Rs 2786.
5. Eligibility – An employee is eligible for pension if he or she has served for more than 10 years and has retired upon reaching 58 years of age. However, an employee is also eligible for a reduced pension after the age of 50, provided he or she is no longer in service.
6. Withdrawal – Pension can be withdrawn prematurely, but the employee must have served for at least 10 years. The benefit withdrawn is not calculated on the basis of the rate of interest but rather on the basis of a fixed table designed specifically for the purpose.
7. Taxability – Though the contributions made towards EPS are tax-free, the pension received later would be taxable.
Related: Tax Benefits after Retirement
8. Interest – The interest rate for EPF and EPS is decided by the central government in consultation with the Central Board of Trustees. There is an EPF rate notification issued every year, and it was 8.55% for the financial year 2017-18.
9. Government role – The government contributes 1.16% of the basic pay towards the employee’s pension. This scheme is backed by the government, so it is a fully secure form of investment. The remaining contribution is made by the employer. The pension amount receivable is known beforehand, so it is a very transparent investment as well.
10. Death and disability – If the pensioner expires, the pension becomes payable to the spouse. However, the widow/widower will get only a reduced pension. A family pension is given to up to two children until they reach the age of 25. A child with a permanent disability gets a pension for the rest of their life. In case the expired pensioner was unmarried, the pension is paid to the nominee.
Related: Alternative sources of income if you don’t have a pension
The Supreme Court recently approved an increase in the pension scheme by doing away with the capping on contribution. However, as the pension will increase, the provident fund corpus will be reduced as the extra contribution will go towards EPF instead of PF.
To conclude, EPS provides much-needed financial security to that section of India’s workforce who earn a lower income and who work with private organisations. These employees often don’t have much money saved at the end of the month, nor do they have the welfare benefits available to public sector employees. Thus, with little planning, you can live a comfortable life after retirement.
