The Employee Provident Fund Organisation is providing subscribers an option to get a higher pension under EPS scheme. Here’s everything you need to know.
Employee Provident Fund (EPF) scheme is the primary and most popular saving instrument among all salaried individuals in India till date. Established in the year 1952, the scheme aims to encourage savings and provide financial security after retirement.
Now, the Employee Provident Fund Organisation (EPFO) is providing subscribers an option to get a higher pension under the EPF scheme. Let’s tell you all about it.
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A refresher on Employee Provident Fund:
As per the Employee Provident Fund Scheme, you contribute 12% of your basic salary towards EPF, and an equal contribution is paid by your employer.
Under this scheme, out of the 12%, 8.33% of the employer’s contribution or Rs. 1,250, whichever is higher, goes towards Employees’ Pension Scheme or EPS and the rest goes into EPF.
Once you retire, you get a lump sum amount including self and employer’s contribution with interest on both under EPF. Under EPS, you get the pension on a monthly basis until you die.
New Rules:
The Supreme Court has recently asked EPFO to give pension to all employees on the basis of their full salary, rather than capping the figure on which contribution is calculated at a maximum of Rs. 15,000 per month.
Now, if you opt for a full pension, the entire 8.33% of your pensionable salary will go into the EPS, instead of paying the excess over Rs. 1,250 towards EPF. So, while your EPS contribution will increase, your contribution towards EPF will go down accordingly.
The new rules are also applicable to those who have recently retired, provided, they return a proportionate amount of their EPF money.
Here are a few things you must consider before you opt for a higher pension:
Firstly, the money invested in EPF earns an annual interest which is revised every year by the Employee Provident Fund Organisation. On the other hand, contributions towards EPS earns no interest.
So, if you are financially savvy and expect yourself to manage your finances after your retirement, you can invest your EPF earnings in some other high earning investment options available in the market on retirement. But, if you do not wish to take any risk, a higher pension can give you and your family the required financial security in your sunset years.
Secondly, your contribution towards EPF is tax-free and you can also get tax exemption on employee’s share under section 80C of the Income Tax Act. On the other hand, pension under EPS is fully taxable, therefore, you need to take into consideration your tax liability after retirement.
So, opting for a higher pension may not be cost-effective for people in the higher tax bracket, but can work out for those in the lower tax brackets.
Additional Reading: Don’t Depend On Your Children During Your Retirement Years
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