Never mind that the government can't make up its mind on how much interest to pay you on your EPF (Employeesâ€™ Provident Fund) for the financial year that finished about a month ago, never mind that the accounts and workings of the EPFO (Employees' Provident Fund Organisation) are as transparent as mud, keep your EPF account going.
Regardless of where the EPF rate is set between 8 per cent and 9 per cent, it will still be the best post-tax rate today, given that the returns are risk-free and tax-free, and you also get a tax break on investment. This, you probably know. What you probably donâ€™t know is that if you keep your EPF going, you become entitled to a monthly pension after you turn 58 â€” for life.
This monthly pension comes to you, courtesy the Employeesâ€™ Pension Scheme (EPS), 1995. The EPS is run by the EPFO as a subset of the EPF, which is mandatory for establishments with more than 20 employees. Every month, 12 per cent of your basic salary and dearness allowance (DA) goes into the EPF. Your employer contributes an identical amount. If the sum of your basic and DA is up to Rs 6,500, you have no choice but to contribute to your EPF; the same goes for your company. But if your basic and DA exceed Rs 6,500, you can opt out.
Most of the money your employer and you put in goes towards building your EPF kitty, on which you are currently earning 8.5 per cent. A part of it, however, goes towards funding your pension. More specifically, of every Rs 12 your employer contributes, Rs 8.33 goes into the EPS; the government chips in another Rs 1.16. When you turn 58, you start getting a pension.
Your monthly pension is based on a standard formula: average monthly salary for the last year in the EPF scheme multiplied by the number of years you have had your EPF account continuously divided by 70. Illustratively, a 58-year-old earning a salary of Rs 50,000 at the time of retirement with 30 years of service will be entitled to Rs 21,429 (50,000 x 30/70).
For those wanting a lumpsum, the EPS has a provision that allows commutation of pension. So, you can take up to one-third of your monthly pension as a lumpsum. The lumpsum you will get is one-third of the monthly pension entitlement multiplied by 100. In the above example, if you take the maximum one-third, you will get a lumpsum of Rs 7.14 lakh (7,143 x 100). And your monthly pension will reduce to Rs 14,286 (21,429 - 7,143).
Although 58 is the stated vesting age, you can opt to receive it any time after turning 50. However, for each year you ask before 58, your pension payout will reduce by 3 per cent. In our above example, if you decide to start your pension on turning 50 (eight years in advance), your monthly payout reduces to Rs 16,286. At 55, it will be Rs 19,500.
There is one qualifier to this rule. Since your pension amount depends on your employerâ€™s contribution, how your employer structures your salary can make a difference â€” sometimes a huge difference â€” to your pension. If your basic and DA exceeds Rs 6,500, EPF is voluntary for you. If you opt to contribute to EPF, you can contribute 12 per cent of your basic plus DA, whatever it might be, but your employer has the discretion to limit its contribution to 12 per cent of Rs 6,500, or Rs 780, a month.
In such a case, for the purpose of calculating pension under EPS, your employer will disclose your basic plus DA to be Rs 6,500, even if it is more than that. In our illustration, where the personâ€™s last basic plus DA was Rs 50,000 and was entitled to a monthly pension of Rs 21,429, the pension would drop to Rs 2,786.
So, check in your salary how much your employer is contributing towards your EPF. If you want to contribute more, you can ask your employer to restructure your salary. That means drawing down your take-home and directing it towards EPF, the enhanced contribution for which is made by your employer. Your â€˜cost to companyâ€™ remains the same, just the heads change.
If your employer does contribute extra, ensure it discloses your actual salary for EPS deductions. Says a senior EPFO official: â€œWe donâ€™t know who is earning how much. We get this information from the employer. If the employer doesnâ€™t declare your actual salary, we deduct 8.33 per cent of Rs 6,500, which becomes the benchmark for your pension.â€
Thereâ€™s one more condition you need to meet to qualify for pension under EPS: your EPF account should complete at least 10 continuous years. For the EPFO, your EPF number is what matters. You can change jobs, but you need to keep the number alive. So, each time you change employers, transfer your account to maintain continuity in your EPF. If you withdraw your EPF balance and open a new account, the EPFO treats you as a new member, and you have to start from scratch.
Alternatively, you can withdraw your EPF before 10 years and still not forfeit your pension. Says the EPFO official: â€œWhen you fill the EPF withdrawal form, you are given a choice to either withdraw your EPS or get a pension scheme certificate. If you choose the latter, the number of years of service you have put in gets transferred to your new EPF account.â€
The EPS is worth tracking, more so if you have been putting money into it.
The payout can be good. Since itâ€™s a defined benefit system, the longer you live, the greater the benefit you draw from it. Says Mumbai-based financial planner Suresh Sadagopan: â€œIf you wish to contribute to your EPF, do so continuously and for the long term. The payout is significant, more so since most of the salaried have no other means of forced savings.â€
Whatâ€™s more, on the subscriberâ€™s death, the benefit goes to the subscriberâ€™s family, even if the subscriber hasnâ€™t completed 10 years. If the subscriber has a spouse and two kids below 25 years of age, the family gets about 75 per cent of the pension amount; the kidsâ€™ position continues till they turn 25. Pension to the spouse is available till remarriage.
However, if your employer caps its monthly contribution at Rs 780, the EPS loses shine. Says Mumbai-based financial planner Kartik Jhaveri: â€œEven if 12 per cent of basic is contributed, the actual amount may be about 2-4 per cent of your total salary, as the basic itself is quite small. That wonâ€™t meet your retirement needs.â€ Jhaveri goes a step further and suggests staying outside the EPF ambit. â€œYou can manage you money the way you like. You can earn more and that too can be tax free,â€ he says.
For new subscribers, thatâ€™s an option. But old subscribers should milk the EPS, the only defined benefit scheme available, for whatever it is worth. Itâ€™s struggling to make ends meet â€” the current deficit stands at Rs 22,000 crore â€” but the government wonâ€™t let it fall. Says A. Viswanathan, Central PF commissioner: â€œAs of now, we donâ€™t invest anything in private sector debt or equity investments. But we may consider this option.â€ Whether that happens or not, keep your EPF going â€” and claim your pension under EPS.