Understanding How it Works and its Pros and Cons
Employees’ Pension Scheme (EPS)! Are you an employee in India looking for a long-term pension plan? If so, the Employees’ Pension Scheme (EPS) administered by the Employees’ Provident Fund Organisation (EPFO) may be worth considering. In this blog post, we’ll take a deep dive into how the EPS works, its pros and cons, eligibility criteria, minimum age to start receiving pension, pension certificate eligibility, and the formulas for calculating EPS contributions and the monthly pension amount.
How Does the Employees’ Pension Scheme (EPS) Work?
The EPS is a defined benefit pension scheme that is administered by the EPFO. It is mandatory for all companies in India with more than 20 employees to enroll their employees in the EPS.
Here’s the formula for calculating your EPS contributions:
Employer contribution = (Employee's salary - INR 15,000) x 8.33%
The EPS contribution rate is 8.33% of the employee’s salary, with the entire amount going towards the employee’s pension account. However, there is a salary upper limit/cap of INR 15,000 per month for calculating EPS contributions. This means that only the portion of the employee’s salary that is above INR 15,000 per month is used to calculate the employer’s contribution. The employee does not contribute to the EPS.
Here’s the formula for calculating the monthly pension amount:
Monthly pension amount = (Average monthly salary x Employment years) / 70
The employment years are based on the number of years of service you have completed. The average monthly salary is calculated based on your salary in the last 12 months of service. The employment years are capped at 30.
Pros of the Employees’ Pension Scheme (EPS)
- Pension after retirement: The EPS provides a pension to employees after they retire.
- Attractive interest rates: The EPS offers attractive interest rates, which can help your pension grow faster.
- Tax benefits: Contributions to the EPS are eligible for tax deductions under Section 80C of the Income Tax Act.
- Safety: The EPS is backed by the government, making it a safe and secure investment option.
- Partial withdrawal allowed: You can make partial withdrawals from your EPS account for certain purposes, such as buying a house or paying for your child’s education.
- Easy to manage: The EPS is easy to manage and you can check your account balance and make transactions online through the EPFO’s website or mobile app.
- Employee benefits: The EPS provides social security benefits to employees, such as a pension after retirement and financial assistance in case of disability or death.
Cons of the Employees’ Pension Scheme (EPS)
- Low liquidity: The EPS is a long-term pension plan and you can’t withdraw your entire account balance before retirement.
- Limited investment options: The EPS only invests in government securities and approved securities, which may not offer the same potential returns as other investment options.
- Administrative issues: There have been instances of administrative issues with the EPFO, such as delays in processing claims and fund mismanagement.
Conclusion
The Employees’ Pension Scheme (EPS) administered by the Employees’ Provident Fund Organisation (EPFO) is a popular long-term pension plan in India that offers attractive interest rates and tax benefits. While it has its pros, it also has some cons to consider, such as low liquidity and limited investment options. If you’re an employee in India looking for a pension plan, it’s worth weighing the pros and cons of the EPS before making a decision.
