De-jargoned | Employees’ Pension Scheme

You know that every month you park 12% of your basic plus dearness allowance (DA) in your Employees’ Provident Fund (EPF) account and your employer pitches in the same amount. But a part of your employer’s contribution goes into a defined pension product called the Employees’ Pension Scheme (EPS).

How does it work?

As per the Employees’ Pension Scheme, 1995, the employer needs to contribute 8.33% of your salary into the EPS. But usually your employer contributes only up to Rs 541 per month, 8.33% of Rs 6,500, irrespective of your salary, to your EPS account. That is because according to EPS 1995, the maximum pensionable salary is restricted to Rs 6,500. So for the purpose of EPS deduction, your employer restricts your basic plus DA to Rs 6,500 only even if it is higher. The balance is invested in your EPF account.

When does eps deliver?

You are entitled to pension under EPS when you turn 58 years of age and after 10 years of continuous service. Since EPS is a defined pension product, the amount of pension you get depends upon a fixed formula, which is average monthly salary of the last year of service multiplied by the number of years of service divided by 70.

But remember your employer shows your salary as Rs 6,500 for EPS, so the pension is calculated on a monthly salary of Rs 6,500. So if you have worked for say 30 years your monthly pension will come to Rs 2,786 according to the formula.

You don’t have to be in the same organization to clock up continuous working years. You can transfer your accounts or get a pension scheme certificate if there is a break in service. This way the number of years of service that you have put in gets transferred to the new account that you open in the new organization.

How to make the most of your eps

A little known fact about EPS is that you can bump up your pension by agreeing to contribute more into your EPS account. If you and your employer decide to contribute not just 8.33% of Rs 6,500 but of the entire basic salary, you get a monthly pension which is based on the actual basic salary drawn by you. For example, if the last drawn salary at the age of 58 years is Rs 50,000 after you have clocked in 30 years, your monthly pension would come to Rs 21,429. But the system is fraught with administrative roadblocks. Transferring your EPF accounts or tracking the scheme certificate can be very tedious. Because of the inefficacy of the system, most employers limit the contribution in EPS to the minimum.