(iStock)
(iStock)

The case for higher EPS deduction

  • The Supreme Court’s dismissal of an appeal concerning EPS creates confusion among subscribers on contribution limit
  • There is uncertainty on the maximum pensionable salary permissible for EPS deduction

The Supreme Court’s dismissal of an appeal concerning the Employees’ Pension Scheme (EPS) has created confusion among its subscribers regarding the contributions to the pension instrument. It has essentially left subscribers earning 15,000 or more with two options. EPS deduction is 8.33% of the applicable salary. Subscribers may be able to either opt for higher EPS deduction, 8.33% of their actual higher salary, or settle with lower EPS deduction, 8.33% of the prescribed salary limit of 6,500. The first set is likely to see a sharp hike in their pension corpuses. This hike is likely to place a substantial financial burden on EPFO, which has roughly 60 million subscribers.

Employees who proactively apply for higher pension have been permitted to divert 8.33% of their actual salary to EPS and get a significantly higher pension. This is because EPS is set by a relatively generous formula depending on the period of service. Let us explain to you how the EPS formula works.

The EPS formula is (pensionable salary multiplied by the number of years of service) and the product divided by 70. Hence, someone with a final pensionable salary of 50,000 per month who has worked for 30 years will get an EPS pension of 21,428 per month. Under the pension cap of 15,000 set by the 2014 notification, EPS would have only been 6,428 per month for the same person. At 6,500, it will be way lower at around 2,787.

Employees may also be able to make back-dated contributions to get this higher pension.

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