eps pension: Know how much you need to pay to get the higher EPS pension, return you can earn

The decision whether or not to apply for higher pension under the Employees’ Pension Scheme (EPS) will mostly depend on a cost-benefit analysis. The first factor that is critical is the amount of money one must deposit to make up for the missing contribution of the past, together with the accumulated interest. However, what matters most is the overall return the entire additional contribution, together with the interest, will give after retirement in the form of pension.

It will be easier for you to decide whether to go for higher EPS or not on the basis of the total return your extra contribution will generate in its lifetime. However, various employment-related factors such as salary, growth in salary and gap in employment will vary for everyone, and this will determine the extent of pension and the additional fund required for the higher pension. Hence, there cannot be a one-size-fits-all calculation. So, a calculation will be only indicative and show some trends to help you make a better decision.

Only those employees are eligible for the higher pension whose basic salary was more than the prevailing wage ceilings of Rs 5,000 till May 2001, Rs 6,500 till August 2014 and Rs 15,000 since September 2014. So, to understand the impact, we have taken a borderline case in which an employee has a salary that grows in such a way that it is just above the new wage ceiling at the time of change.

Let us assume a person started his employment on April 1, 1995, with a basic salary of Rs 5,000. The salary grows annually at 7.5%. Higher pension needs a higher EPS contribution. So we have to figure out the additional contribution and accumulated interest both for past and future to figure out the final amount he needs to divert towards EPS to get a higher pension. We have done that below, and also provided the amount for total contributions and pensions under both conditions. We have also given the return generated on additional corpus to get the higher pension.

When you retire after 35 years under EPS 95

*Including additional contribution toward EPS in past 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 5,000 on April 1, 1996, which grows annually at 7.5%, EPS contributions remain uninterrupted during consideration period People employed before 1996
The overall returns appear to be very attractive for people who will complete 35 years of employment without any break since 1996. However, there are many who were employed earlier and moved to EPS 95 when it was launched. For them, the pensionable service under EPS 95 will be lower. They can refer to the tables for retirement periods of 30 years, 25 years and 20 years to understand the higher EPS complication.

People who withdraw their EPF and EPS contribution during early years
There are many people who may have withdrawn their earlier contribution and may have saved only the latter part of their contribution. The eligible pensionable service for such people will be lesser and can be considered only for the period during which they actually contributed to the EPS.

Factor related to 1.16% contribution on salary above wage ceiling
There is another factor related to the payment of an additional 1.16% contribution on a salary above the wage ceiling of Rs 15,000 which the EPFO had mandated in the 2014 amendment for members opting for higher EPS contribution. The Supreme Court had asked the EPFO to find some alternative to it. This factor may have some material impact on these calculations.

When you retire after 30 years of employment under EPS 95

When you retire after 25 years of employment under EPS 95

When you retire after 20 years of employment under EPS 95

However, your post-retirement return will come down if you leave your employment early and wait for the retirement age to start receiving your pension. As pensionable service and salary will not change during this period, the pension amount will not either. However, it will escalate your opportunity cost. Even when you are not employed, your EPS corpus will keep growing and so the corpus will get bigger. As a result, the overall yield on your retirement corpus will come down. Therefore, the closer you are to your retirement, the more rewarding it is for you to go for the higher pension.