There is a proposal for the Employees’ Pension Scheme (EPS) to adopt a structure similar to the National Pension System (NPS), enabling contributions to earn fixed interest and accumulate into a significant retirement corpus.
Employees’ Pension Scheme: Under the rules of the Employees’ Provident Fund Organisation (EPFO), an employee’s entire monthly contribution of 12% of their basic pay goes to the Employees’ Provident Fund (EPF) to build a retirement corpus. The employer matches this contribution, but of the employer’s share, 8.33% goes toward the pension contribution under the EPS-95, while the remaining 3.67% is allocated to the EPF.
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The EPF corpus grows over time, as the EPFO offers a fixed interest rate, currently at 8.25% per annum, which benefits from compounding. However, the employer’s contribution of 8.33% of the employee’s basic pay does not earn interest; this amount is simply added each month until the employee’s retirement. The contribution may change if there is a revision in the employee’s basic salary. Additionally, the wage ceiling for pension contributions under the EPFO is currently capped at Rs 15,000 per month. One must contribute at least for 10 years to the EPS to become eligible for a pension on retirement.
However, this whole mathematics and calculations with regards to pension wealth accumulation under the EPS-95 might change if this new proposal gets through. According to a media report, a pensioners’ group in Bengaluru has reiterated its demand to calculate pension wealth in line with the National Pension System (NPS) and to fix an 8% interest rate per annum on pension corpus.
According to a report in ‘The Hindu’, the ITI Retired Officers Association (IRIROA) highlighted that while the EPS is a contributory scheme similar to the NPS, the pension amount is calculated based on a ‘fixed pensionable salary’ rather than on the accumulated pension fund, as is done in the NPS.
How will the new EPS calculation proposal impact your pension corpus?
If this proposal is approved, the Employees’ Pension Scheme (EPS) will function similarly to the National Pension System (NPS). Under this new structure, the employee’s contribution will earn a fixed interest rate annually, allowing the pension corpus to accumulate until retirement. Let’s explore how this would work using a calculation based on the current wage limit of Rs 15,000 and the proposed interest rate of 8%.
Calculating the employer’s contribution of 8.33% on Rs 15,000 yields a monthly amount of Rs 1,250, which totals Rs 15,000 annually. If this amount earns 8% interest until retirement, it can lead to a substantial pension corpus.
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Assuming you start working at age 23 and retire at 58, your pension wealth will accumulate over 35 years. Investing Rs 15,000 annually at an 8% interest rate would result in a total investment of Rs 5,25,000 over 35 years, generating an interest amount of Rs 23,61,469. Thus, the total corpus at retirement would be Rs 28,86,469.
Since this proposal aligns with the NPS, the accumulated amount would likely be invested in an annuity scheme, where a fixed pension would be provided. If you allocate the entire Rs 28.86 lakh to an annuity scheme at a rate of 6% per annum, you would receive a monthly pension of approximately Rs 14,432.
This potential change could significantly enhance your retirement savings and provide a more stable income during your retirement years.
Also Read : Government may raise EPFO wage ceiling to ₹21,000, allowing you to retire with ₹1 crore: Report
Current structure of the Employees’ Pension Scheme (EPS)
To clarify for EPS subscribers, the Employees’ Pension Scheme (EPS) currently does not earn any interest. The pension amount is calculated based on the average monthly salary from the last year of service, multiplied by the total years of service, and then divided by 70.
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