Higher EPS pension calculation: Know the extra amount you need to pay, returns you will get; should you go for it?

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The Employees’ Provident Fund Organisation (EPFO) has come out with clarifications for many doubts regarding computation of the shortfall in contribution and accrued interest for those opting for the higher pension scheme. The provident fund body has notified the replacement mechanism for 1.16% additional contribution that the members were required to pay on a wage above Rs 15,000 when opting for the higher EPS pension; it will now be added to the employer’s contribution towards EPS, taking it to 9.49%. It will help employees analyse their additional contribution and the return they can expect on it. Now, the next question is whether you should go in for the higher pension scheme or not. Impact of new rule regarding 1.16% extra contribution

Employees opting for the higher pension will not have to pay the additional 1.16% contribution on salary above Rs 15,000 from their salary; it will come from the employer’s overall contribution of 12% towards EPS and EPF. This is because the employer’s contribution towards EPS has been kept at 8.33% for salary up to the current wage ceiling of Rs 15,000 but the contribution towards EPS by the employer has been raised from 8.33% to 9.49% on salary above the wage ceiling of Rs 15,000. This rule will be applicable not only on future contributions but also on the contributions required to make up for the shortfall (since September 1, 2014) for employees applying for the higher pension now. A member will be required to pay not only the missing contribution at a higher rate of 8.33% and 9.49% on salary up to Rs 15,000 and above Rs 15,000, respectively, but will also have to pay the accrued interest amount till date at the applicable historical EPF interest rate.

For service period before September 1, 2014, the revised maximum employer’s contribution will be calculated at 8.33% of the actual wage to find out the missing contribution of past and accrued interest.

This missing dues for EPS contribution with interest can be either transferred from the EPF account if it has sufficient balance or in case of a shortfall the balance amount will have to be deposited from the member’s bank account.

Therefore, the sole important factor that will tell you whether you should go for the higher pension or not is the return on your additional amount that you need to deposit for getting the higher pension.

When you retire after 35 years under EPS 95

Date of oldest active EPS 95 contribution Basic monthly salary Date of Retirement Basic monthly salary EPS pension under old rule Higher EPS 95 Pension Total additional Contribution* Return (IRR) on additional fund post retirement life of 15 yrs
1-Apr-96 Rs 5,000 31-Mar-31 Rs 58,460 Rs 7,929 Rs 26,879 Rs 11.21 lakh 18.7%
1-Apr-97 Rs 5,375 31-Mar-32 Rs 62,844 Rs 7,929 Rs 28,895 Rs 12.70 lakh 18.2%
1-Apr-98 Rs 5,778 31-Mar-33 Rs 67,558 Rs 7,929 Rs 31,062 Rs 14.35 lakh 17.7%
1-Apr-99 Rs 6,211 31-Mar-34 Rs 72,625 Rs 7,929 Rs 33,392 Rs 16.20 lakh 17.1%
1-Apr-00 Rs 6,677 31-Mar-35 Rs 78,071 Rs 7,929 Rs 35,896 Rs 18.25 lakh 16.5%
1-Apr-01 Rs 7,178 31-Mar-36 Rs 83,927 Rs 7,929 Rs 38,588 Rs 20.55 lakh 16.0%

*Including additional contribution toward EPS in past (9.49% towards EPS on wage above Rs 15000 since Sept 1, 2014) and future together with interest till retirement, historical annual interest rate till FY22 taken from EPFO; Assumptions: Future interest since FY23 to retirement is 8%, starting with a monthly basic salary of Rs 5000 on April 1, 1996 which grows annually at 7.5%, EPS contribution remains uninterrupted during consideration period

People who retired after August 2014 or close to retirement will gain most
The pension amount under EPS 95 depends primarily on two factors: length of service and average salary of the past 5 years. Had the contribution rate been similar throughout the service period, it would not have made much difference when you joined and when you will retire. However, as the contribution rate went up since September 1, 2014, members will have to contribute at a higher rate for the same pension.

Therefore, the most critical part that pushes your ROI higher or brings it down is your length of service falling under additional contribution period starting from September 1, 2014. The lower your service period after September 1, 2014, the higher will be your return on the additional amount that you pay for higher pension. So, people who retired after August 2014 or are close to retirement are better off in terms of higher return as their length of service will be higher in the period they are not required to contribute additional 1.16%.

When you retire after 30 years under EPS 95

Date of Joining EPS 95 Basic monthly salary Date of Retirement Basic monthly salary EPS pension under old rule Higher EPS 95 Pension Total additional Contribution* Return (IRR) on additional fund post retirement life of 15 yrs
1-Apr-96 Rs 5,000 31-Mar-26 Rs 40,721 Rs 6,857 Rs 16,193 Rs 5.87 lakh 17.4%
1-Apr-97 Rs 5,375 31-Mar-27 Rs 43,775 Rs 6,857 Rs 17,407 Rs 6.70 lakh 17.1%
1-Apr-98 Rs 5,778 31-Mar-28 Rs 47,058 Rs 6,857 Rs 18,713 Rs 7.64 lakh 16.8%
1-Apr-99 Rs 6,211 31-Mar-29 Rs 50,587 Rs 6,857 Rs 20,116 Rs 8.68 lakh 16.5%
1-Apr-00 Rs 6,677 31-Mar-30 Rs 54,381 Rs 6,857 Rs 21,625 Rs 9.85 lakh 16.1%
1-Apr-01 Rs 7,178 31-Mar-31 Rs 58,460 Rs 6,857 Rs 23,247 Rs 11.17 lakh 15.6%
1-Apr-02 Rs 7,717 31-Mar-32 Rs 62,844 Rs 6,857 Rs 24,990 Rs 12.65 lakh 15.1%
1-Apr-03 Rs 8,295 31-Mar-33 Rs 67,558 Rs 6,857 Rs 26,864 Rs 14.29 lakh 14.6%
1-Apr-04 Rs 8,917 31-Mar-34 Rs 72,625 Rs 6,857 Rs 28,879 Rs 16.13 lakh 14.1%
1-Apr-05 Rs 9,586 31-Mar-35 Rs 78,071 Rs 6,857 Rs 31,045 Rs 18.16 lakh 13.6%
1-Apr-06 Rs 10,305 31-Mar-36 Rs 83,927 Rs 6,857 Rs 33,374 Rs 20.42 lakh 13.1%

Why higher EPS will deliver good return for most
The retirement age under EPS is currently 58 years. The global average life expectancy is around 73 years. The life expectancy in India is reaching close to 70 years and has been rising gradually. So, if we consider 15 years of post-retirement life, then most members will have a service period of 20 years or above. They will get a very good IRR of 8% or above on the future value of all additional contributions, at the time of retirement. This is the lowest assured return you are expected to get 10 years from now. As the growth of the country slows, interest rates will start coming down gradually. In such a scenario, 8% or more assured return for life is worth going in for.

With medical facilities improving, many people are expected to live longer. The longer you live, the higher will be your return on the additional contribution.

The higher EPS pension will be highly advantageous for people who have seen a steep salary rise closer to retirement. The higher your last 5 years’ basic salary, the bigger will be your pension and the higher will be your return on additional contribution.

When you retire after 25 years under EPS 95

Date of Joining EPS Basic monthly salary Date of Retirement Basic monthly salary Pension under old rule Higher EPS 95 Pension Total additional Contribution* Return (IRR) on additional fund post retirement life of 15 yrs
1-Apr-96 Rs 5,000 31-Mar-21 Rs 28,364 Rs 5,786 Rs 9,517 Rs 2.95lakh 12.6%
1-Apr-97 Rs 5,375 31-Mar-22 Rs 30,492 Rs 5,786 Rs 10,231 Rs 3.40 lakh 13.3%
1-Apr-98 Rs 5,778 31-Mar-23 Rs 32,779 Rs 5,786 Rs 10,998 Rs 3.90 lakh 13.7%
1-Apr-99 Rs 6,211 31-Mar-24 Rs 35,237 Rs 5,786 Rs 11,823 Rs 4.47 lakh 13.9%
1-Apr-00 Rs 6,677 31-Mar-25 Rs 37,880 Rs 5,786 Rs 12,709 Rs 5.10 lakh 14.0%
1-Apr-01 Rs 7,178 31-Mar-26 Rs 40,721 Rs 5,786 Rs 13,663 Rs 5.83 lakh 13.9%
1-Apr-02 Rs 7,717 31-Mar-27 Rs 43,775 Rs 5,786 Rs 14,687 Rs 6.66 lakh 13.7%
1-Apr-03 Rs 8,295 31-Mar-28 Rs 47,058 Rs 5,786 RS 15,789 Rs 7.58 lakh 13.5%
1-Apr-04 Rs 8,917 31-Mar-29 Rs 50,587 Rs 5,786 Rs 16,973 Rs 8.61 lakh 13.2%
1-Apr-05 Rs 9,586 31-Mar-30 Rs 54,381 Rs 5,786 Rs 18,246 Rs 9.76 lakh 12.8%
1-Apr-06 Rs 10,305 31-Mar-31 Rs 58,460 Rs 5,786 Rs 19,614 Rs 11.05 lakh 12.4%
1-Apr-07 Rs 11,078 31-Mar-32 Rs 62,844 Rs 5,786 Rs 21,086 Rs 12.48 lakh 12.0%
1-Apr-08 Rs 11,909 31-Mar-33 Rs 67,558 Rs 5,786 Rs 22,667 Rs 14.07 lakh 11.6%
1-Apr-09 Rs 12,802 31-Mar-34 Rs 72,625 Rs 5,786 Rs 24,367 Rs 15.85 lakh 11.2%
1-Apr-10 Rs 13,762 31-Mar-35 Rs 78,071 Rs 5,786 Rs 26,194 Rs 17.82 lakh 10.8%
1-Apr-11 Rs 14,794 31-Mar-36 Rs 83,927 Rs 5,786 Rs 28,159 Rs 20.01 lakh 10.4%

Who can consider giving higher EPS pension a miss?
People whose total length of service with active EPS contribution is less than 20 years are likely to get only a moderate return on their corpus. This is primarily because you get a bonus of 2 years added to the length of service if your eligible service period is 20 years or more. This pushes up your pension amount. But it doesn’t happen if your service length is less than 20 years. On top of this, if a major part of your service period falls after 2014, the attractiveness of the higher EPS comes down. You may have many alternatives like deploying your funds in equity and going for much higher return over a long period.

When you retire after 20 years under EPS 95

Date of Joining EPS Basic monthly salary Date of Retirement Basic monthly salary Pension under old rule Higher EPS 95 Pension Total additional Contribution* Return (IRR) on additional fund post retirement life of 15 yrs
1-Apr-96 Rs 5,000 31-Mar-16 Rs 19,757 Rs 2,887 Rs 5,401 Rs 1.43 lakh 19.6%
1-Apr-97 Rs 5,375 31-Mar-17 Rs 21,239 Rs 3,422 Rs 5,807 Rs 1.65 lakh 15.2%
1-Apr-98 Rs 5,778 31-Mar-18 Rs 22,832 Rs 3,957 Rs 6,242 Rs 1.91 lakh 11.6%
1-Apr-99 Rs 6,211 31-Mar-19 Rs 24,545 Rs 4,491 Rs 6,710 Rs 2.20 lakh 8.6%
1-Apr-00 Rs 6,677 31-Mar-20 Rs 26,385 Rs 4,714 Rs 7,213 Rs 2.53 lakh 8.2%
1-Apr-01 Rs 7,178 31-Mar-21 Rs 28,364 Rs 4,714 Rs7,754 Rs 2.92 lakh 9.1%
1-Apr-02 Rs 7,717 31-Mar-22 Rs 30,492 Rs 4,714 Rs8,336 Rs 3.35 lakh 9.7%
1-Apr-03 Rs 8,295 31-Mar-23 Rs 32,779 Rs 4,714 Rs 8,961 Rs 3.84 lakh 10.2%
1-Apr-04 Rs 8,917 31-Mar-24 Rs 35,237 Rs 4,714 Rs 9,633 Rs 4.39 lakh 10.4%
1-Apr-05 Rs 9,586 31-Mar-25 Rs 37,880 Rs 4,714 Rs 10,356 Rs 5.01 lakh 10.5%
1-Apr-06 Rs 10,305 31-Mar-26 Rs 40,721 Rs 4,714 Rs 11,132 Rs 5.70 lakh 10.5%
1-Apr-07 Rs 11,078 31-Mar-27 Rs 43,775 Rs 4,714 Rs 11,967 Rs 6.48 lakh 10.4%
1-Apr-08 Rs 11,909 31-Mar-28 Rs 47,058 Rs 4,714 Rs 12,865 Rs 7.36 lakh 10.2%
1-Apr-09 Rs 12,802 31-Mar-29 Rs 50,587 Rs 4,714 Rs 13,830 Rs 8.33 lakh 10.0%
1-Apr-10 Rs 13,762 31-Mar-30 Rs 54,381 Rs 4,714 Rs 14,867 Rs 9.42 lakh 9.7%
1-Apr-11 Rs 14,794 31-Mar-31 Rs 58,460 Rs 4,714 Rs 15,982 Rs 10.63 lakh 9.4%
1-Apr-12 Rs 15,904 31-Mar-32 Rs 62,844 Rs 4,714 Rs 17,181 Rs 11.98 lakh 9.1%
1-Apr-13 Rs 17,097 31-Mar-33 Rs 67,558 Rs 4,714 Rs 18,469 Rs 13.48 lakh 8.8%
1-Apr-14 Rs 18,379 31-Mar-34 Rs 72,625 Rs 4,714 Rs 19,855 Rs 15.15 lakh 8.4%

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