Understanding EPS Calculation: Is It Based on Capped or Entire Basic Salary?

Hi,

I want to know how the EPS is calculated. Is it 8.33% of the capped monthly basic salary, i.e., 6500 (max. of Rs. 541), or 8.33% of the entire basic salary? I have read in a leading business newspaper that I can ask the company HR/Finance to change the EPS calculation to the entire basic salary. Please clarify this.

Regards,
Bhargav

Dear Bhargav,

PF is to be deducted at 12% from the Employee and 8.33% for Pension from the employer, with an additional 3.67% employer PF contribution. If a person's basic pay exceeds Rs. 6500/-, then 12% PF will be deducted from the employee, Rs. 541/- for Pension from the employer, and any remaining amount will be carried forward to the employer's PF.

The government is currently considering enhancing the Pension contribution amount.

With warm regards,

S. Bhaskar
9099024667

Dear Bhargav,

I shall quote clause 11(3) of the EPS-95:

"The maximum pensionable salary shall be limited to Rs. 6500/- per month. Provided that if, at the option of the employer and employee, contributions are paid on a salary exceeding Rs. 6500/- per month from the date of commencement of this Scheme or from the date the salary exceeds Rs. 6500/-, whichever is later, and 8.33% share of the employers thereof is remitted into the Pension Fund, the pensionable salary shall be based on such higher salary."

However, to date, no such contributions to EPS for a salary in excess of Rs. 6500 per month have been reported from anywhere in India. I am aware of a few cases where the EPFO has not entertained such an option. In practice, regardless of the provisions in the scheme, contributions are based on the salary subject to the ceiling of Rs. 6500.

Abbas.P.S

Dear Abbas,

You are right. We made an attempt to pay an enhanced contribution in excess of Rs. 6500/- way back in 2002 and applied to the EPFO based on a newspaper article published in Times of India, New Delhi edition. However, it was stated that the option should have been done at the time of amendment of the wage ceiling, which I think was in the year 1998, if I am not wrong.

But we also weighed other options.

1. The employee needs to contribute on the higher wages with retrospective effect.

2. The loans taken by the employee were based on the employer and employee contributions in respect of housing loan. So these need to be reworked.

3. As long as the employee works in the organization, it will benefit him. But if he leaves the organization, and the new organization restricts his wages to Rs. 6500/-, then the contribution made by him towards the EPS in his previous employment will not benefit him as the contributions go into the corpus fund. On the other hand, if the EPS is paid on Rs. 6500/-, then the remaining amount gets credited to his EPF account, which he can withdraw.

If and only when the amendment removing the wage ceiling comes across India will employees benefit.

M.V. KANNAN

Whatever I write below is applicable only to employees of Private sector in India ( including IT and BPO employees ), since Govt. companies have their own separate pension fund ( as far as I know ).

Employees Pension Scheme (EPS ) is operated by EPFO EPFO , the same organisation which handles your Provident Fund( PF ) as well.

12% of your Basic salary goes to EPFO.An equivalent amount is contributed by your Employer as well i.e. in total 24% of your basic salary goes to EPFO.

This amount ( i.e. 24% of your basic salary ) is allocated into different accounts as follows:

1. EPS  8.33% of your basic salary goes towards EPS, subject to a maximum of Rs. 541/- (i.e. 8.33% of Rs. 6500 )

2. The rest of the amount goes into the PF account.

An example of this allocation can be found in this file.

You earn certain % of interest on the amount in your PF account. The rate of interest is decided by the Board of EPFO. Whatever is the amount accumulated in this PF account by the time you retire, you receive that as a lump sum.

But we are only interested in what happens to the amount deposited in the EPS account. The amount accumulated in your EPS account is paid back to you as a monthly pension after you retire.

Now its time for some serious number crunching, here we go:

Ram joins a company at Age 25, works there for 35 years and retires at the age of 60.Lets assume his basic salary was Rs. 10,000/- from the beginning of his employement to his retirement.

Since his basic salary was greater than Rs. 6500/- the amount that went towards EPS was Rs. 541/- ( the EPS rules place a cap on the maximum basic salary which is used to calculate your contribution and your monthly pension )

After retirement his monthly pension would be calculated using the below formula:

( Pensionable salary X Pensionable service ) / 70

Here,

Pensionable salary = Rs. 6500/- (remember, EPS rules place a cap on basic salary )

Pensionable service= 35 years ( the number of years he was in service, and contributed to EPS )

So, the calculation yields.

( 6500 X 35 ) / 70 = Rs. 3250/- ( Rams monthly pension )

i.e. his annual pension is Rs. 39,000/-

So now we need to calculate whether Ram got a fair deal. Whether this monthly pension paid to him was just?

Lets use a recurring deposit calculator, to estimate how much he would have accumulated in his EPS account by the time he retires. We assume a conservative rate of interest 8%

It would be Rs. 12,49,263/-

To calculate:

1.Go to this link

http://teacherone.com <link updated to site home>

2. Enter amount as Rs. 541/-

3. Frequency of deposit: Monthly

4. Rate of interest: 8 %

5. Duration: 420 months ( 35 years X 12 months )

6. Press Calculate Maturity amount button. You will get 12,49,263

There are annuity ( i.e. immediate payment of pension ) schemes offered by public and private life insurance companies. Lets take LIC ( a govt. owned life insurer ).

It offers a scheme known Jeevan Akshay which is an immediate pension plan.

LIC - Life Insurance Corporation of India

A PDF printout of the page in this link is here.

Observe the table on top of Page 2 of this PDF file.

For Rs. 1 lakh price, anyone retiring at age 60 can get a annual pension Rs. 9350/- ( constant and guaranteed for his lifetime )

Since Mr. Ram has Rs. 12,49,263/- with him ( I am assuming that the amount accumulated in his EPS account is given back to him on retirement, but as per the rules this does not happen ), lets calculate how much annual pension he can get from LIC. We use the premium calculator available on LICs website to do this.

1. Go to this link. LIC - Life Insurance Corporation of India

2. Choose Jeevan Akshay from the drop-down.

3. Press on Select Product button.

4. Enter date of birth as 31/12/1947, so that he is 60 years today.

5. Enter purchase price as 1249263 (the amount accumulated in Mr. Rams EPS)

6. Annuity type is Annuity payable for life

7. Annuity mode is yearly.

8. Press on Calculate premium button.

The annual pension is shown to be Rs. 1,21,803/-

This translates into a monthly pension of approx. Rs. 10,000/-

What a scam!!!

A person who deserves a monthly pension greater than Rs. 10,000/- is paid only peanuts ( Rs. 3250/- ) by the EPFO.

This is a scheme by the Govt and for the Govt, to cheat people of their retirement money. Anybody who has the option to take money out of EPS scheme and purchase annuity on his own, will get three times the pension he gets from EPFO.

PS: EPS rules can be found at this link

http://epfindia.com <link updated to site home>

Disclosure: I am not an accountant or CA and the above calculation is as per my understanding of the EPS rules. I am writing this post so that an qualified CA can comment on the above, whether my concerns are genuine. If you know a CA or accountant, please pass this blog post on to him and ask his opinion on it.

Dear Kamal Sharma,

I am of the opinion that the EPS has to be reasonably revised in favor of the employees, especially the curtailment of Return of Capital is totally unjust. By diverting a portion of EPF, Pension Fund is being accumulated. The interest from this accumulation is received as pension. However, what about our capital investment? Under this context, the provision of "Return of Capital" was incorporated into EPS.

Your comparison with other Financial Agencies is not realistic. This may lead PF members and the public to misunderstandings. Therefore, I am intervening in this matter.

You have projected that the income from other agencies will be around 10,000, compared to a meager pension from EPF. However, you are silent on two aspects.

1. In the last 35 years, the ceiling limit of PF has been revised 5 times. Before 1983, it was Rs. 1000. From 1.4.83 to 31.8.85 - Rs. 1600, From 1.9.85 to 31.10.90 - Rs. 2500, From 1.11.90 to 30.9.94 - Rs. 3500, From 1.10.94 to 31.5.2001 - Rs. 5000 & From 1.6.2001 onwards it is Rs. 6500. i.e., the ceiling limit has been enhanced by 6.5 times within 35 years.

2. For a pensionable service of above 19 years, 2 years' bonus will be added.

Taking the above enhancements into account, the pension amount of 3250 will become 3250x6.5x37/35 = Rs. 22332. At the same time, the hike in deposit will be 3.8 times.

However, the EPS is still very nominal, and the withdrawal of Return of Capital is purely unjust.

Abbas P.S.