Should you opt for higher EPS?

One of the most important parts of your salary which almost everyone is aware of is EPF (Employee Provident Fund) contribution. EPF contribution is one move from the government to provide you a certain amount of security during your retirement years. Though, the same is not enough to sail over retirement, which is a completely different story altogether. Let's look at certain changes that are happening in this front.

Situation till now
The 12 per cent contribution done by the employee goes towards EPF and the employer has to match the same. However, of that 12 per cent contributed by employer 8.33 per cent goes towards EPS (Employee Pension Scheme), 0.5 per cent goes towards EDLI (Employee Deposit Linked Insurance) scheme and remaining 3.17 per cent goes towards EPF. However, the maximum wage ceiling is of Rs. 15,000. This means that the employee’s contribution can be maximum up to Rs. 1,800 towards EPF. On the other hand, the employer’s maximum contribution would be Rs. 1,250 towards EPS, and Rs. 550 towards EPF. So, the total EPF contribution would be Rs. 2,350.

Situation going forward
According to the recent Supreme Court ruling in this regards, the maximum wage limitation of Rs 15,000 on pensionable salary has been removed. Now, if your pensionable salary is more than Rs. 15,000 then you can opt for a higher pension. The average pensionable salary now will be calculated based on your 12 months’ pay and not based on your 60 months’ pay as earlier. The employees from the organizations with PF (Provident Fund) trusts also can opt for higher EPS contribution for higher pensions. Even if you have recently retired, you can opt for the higher pension, but the condition is that you will have to return the proportionate amount of EPF money.

As per the above illustration, the total contribution towards EPF would be Rs. 10,750 (Employee + Employer contribution) in the old way and in the new way total contribution towards EPF would be Rs. 7,800 (Employee + Employer contribution). So, the contribution towards EPF would reduce if you opt for the higher pension.

So, should you opt for higher EPS?
Now the biggest question is should you opt for this with which you would be eligible for a higher pension? If you are not very particular when it comes to savings and investment or you are in a lower tax bracket then it would better to opt for this higher pension option. However, do remember that the pension amount that you would receive would be fully taxable in your hands. So, one in higher tax bracket should avoid opting for the higher pension option, rather invest in mutual funds and accumulate until retirement and then systematically withdraw with SWP (Systematic Withdrawal Plan) option during your retirement phase as doing so would be more tax efficient.