The Employees’ Pension Scheme (EPS) is a significant aspect of the retirement planning landscape in India, yet, there exist numerous misconceptions surrounding it. Introduced in 1995, the EPS aims to provide financial assistance to employees post-retirement based on their employment tenure and salary history. However, this scheme is often misunderstood, and this article aims to bring clarity by debunking some pervasive myths.
Myth 1: The EPS Covers Only the Employees’ Provident Fund (EPF) Account Holders
Fact: While it is true that contributions to EPS are drawn from the Employee Provident Fund (EPF), it is erroneous to believe that only EPF account holders are eligible. Employees pension scheme is mandated for all employees covered under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. It applies to organizations with 20 or more employees, ensuring a wider coverage beyond just EPF account holders.
Myth 2: The Employer’s Contribution Fully Goes to the EPF
Fact: Employees often assume that the entirety of the employer’s contribution goes into their EPF account. In reality, the employer’s contribution is split; 8.33% of the employee’s salary (capped at ₹15,000 per month) is diverted towards EPS, while the remaining goes into the EPF. For example, if an employee’s basic monthly salary is ₹20,000, only ₹15,000 will be considered for EPS, leading to an EPS contribution of ₹1,250 per month (8.33% of ₹15,000), with the rest going to the EPF.
Myth 3: The EPS Contribution Amounts to a Significant Retirement Corpus
Fact: The regular EPS contributions might mislead employees into thinking that it will provide a sizable retirement corpus. However, EPS is designed to provide a steady pension rather than a lump-sum amount. The pension amount is calculated based on a predefined formula: Pension Amount = (Pensionable Salary × Pensionable Service) ÷ 70. For an employee whose pensionable salary is ₹15,000 and has rendered 30 years of service, the monthly pension will be:
(₹15,000 × 30) ÷ 70 = ₹6,429 approximately.
Myth 4: EPS Certificates Are Not Necessary for Claiming Pension
Fact: Employees believe that they can claim pensions without EPS certificates. However, it is crucial to obtain an EPS certificate, especially when changing jobs. This certificate documents the service period and accumulated pension amount, which is essential for calculating the final pensionable amount.
Myth 5: EPS and PFRDA New Pension Scheme are Similar
Fact: Another common misconception is that EPS and the PFRDA New Pension Scheme are identical. While both schemes aim to provide post-retirement financial security, they operate differently. The PFRDA New Pension Scheme (NPS) is a contribution-based scheme with an option to partially withdraw post-retirement, promoting a more flexible approach compared to EPS’s fixed-pension methodology.
Myth 6: Full Pension Withdrawal is Possible After Resignation
Fact: Many employees are under the false impression that they can withdraw the entire EPS amount after resigning. EPS does not allow full withdrawal; instead, only contributions made towards the EPF can be withdrawn. The EPS is intended strictly for pension benefits, disbursed monthly post-retirement, or upon meeting specific conditions like permanent disablement.
Myth 7: No Pension Without Completing 10 Years of Service
Fact: Employees often think they are ineligible for any pension if they haven’t completed 10 years of service. However, employees with less than 10 years of service can still withdraw the accumulated EPS amount. On completing 10 years, they become eligible for a lifelong pension.
Frequently Asked Questions:
Q1: Can one continue EPS after higher earnings?
For employees earning more than ₹15,000 per month, the EPS contributions would still be limited to the ₹15,000 cap. Therefore, the pensionable salary would always be counted as ₹15,000 for the calculation of EPS benefits, irrespective of actual earnings.
Q2: What happens to EPS contributions after early retirement?
In case of early retirement, the individual can withdraw the accrued pension based on the years of service or opt for a reduced pension if retirement occurs before reaching 58 years of age.
Conclusion
The Employees’ Pension Scheme (EPS) is a well-intentioned instrument aimed at safeguarding post-retirement lives of employees. Misconceptions around the scheme may lead to unrealistic expectations and inefficient financial planning. Understanding the specific mechanics, contribution limits, and the distinction between EPS and other schemes like the PFRDA New Pension Scheme (NPS) can enhance employee awareness and result in better financial decisions. Always ensure thorough understanding and consult a financial advisor when dealing with retirement savings instruments.
Summary
The Employees’ Pension Scheme (EPS) is a pivotal aspect of financial planning for employees in India; however, numerous misconceptions can lead to misunderstandings and financial miscalculations. One prominent misconception is that EPS only covers EPF account holders, while in reality, it spans all employees under specific legislative coverages. Additionally, there is confusion about how employer contributions are divided between EPF and EPS. Another common myth is that EPS aims to provide a large corpus upon retirement; instead, it provides a monthly pension based on a specific formula involving salary and service tenure.
It is also mistakenly believed that EPS and the PFRDA New Pension Scheme function similarly, though they serve different purposes with distinct operational methods. Moreover, employees believe they can withdraw the entire EPS amount post-resignation, which is incorrect as EPS only disburses monthly pensions. Lastly, there is a misconception that employees with less than 10 years of service are ineligible for benefits, whereas such employees can withdraw their accumulated contributions.
Understanding these nuances not only helps in better financial planning but also ensures that employees can accurately navigate their post-retirement financial landscape.
Disclaimer:
This article is for informational purposes only and should not be construed as financial advice. Investments in the Indian financial market should be made after evaluating all possible scenarios. Understanding the pros and cons associated with them.
