The Central Board of Trustees (CBT) of retirement fund body EPFO recently turned down the proposal to reduce the mandatory contributions from workers and employers to 10%. So a reduction from 12 to 10% would have put more money in the pockets of salaried class. This rejection by CBT whether good or bad, will be a matter to be debated some other day.
As of now, all of us know that employees and employers contribute 12% of basic salary/wages. But have you wondered what happens to the 12% contribution that the employer also makes? Does he really contribute 12% of your basic salary/wages?
In the following paragraphs, let’s try to understand the nuts and bolts about EPF and miscellaneous Provisions Act, 1952 and follow the money trail.
When you join an establishment covered under the EPF Act, 1952, you automatically become a member of Employees Provident Fund Scheme (EPF), Employees’ Pension Scheme (EPS) 1995 and Employees Deposit Linked Insurance Scheme (EDLIS), 1976.
A total of 12 % of your contribution (12% of the Basic salary) goes in to the EPF.
The employer contributes not 12% but 13.61% of your basic salary, out of which 3.67% goes in to EPF and 8.33% goes in to EPS (Employee Pension Scheme, 1995) subject to a maximum of Rs 541 before October 2014 and Rs 1,250 after October 2014.
In other words, the employer contributes either 8.33% of your basic or Rs 1,250 (which is 8.33% of Rs 15,000) whichever is lower. So the maximum contribution that the employer makes to the EPS is capped at Rs 1,250 per month irrespective of your basic salary.
Let’s look at some of the features of the scheme:
When an employee is covered under EPF, he automatically becomes a member of EPSUnlike the EPF portion, EPS portion does not earn any interest. This is because the focus is on social security and not on returns
Pension is calculated as follows: Average salary for the last 15 years X No of years completed in service /70
Goverdhan has worked for a company for 30 years and his average salary for the last 15 years is Rs 80,000, however, for pensionable service the maximum salary considered is Rs 15,000 only. So Goverdhan’s pension will be: Rs 15,000 X 30/70 = Rs 6,248 per month
The fraction of service for six months or more will be treated as one year and the service less than six months will be ignored. So 19 years and 7 months will be rounded up to 20 years
An employee can start receiving regular pension under EPS only after rendering a minimum service of 10 years and on attaining the age of 58 years
No pension is payable before the age of 50 years
Early pension can be claimed when you are 50 years. But it is subject to discounting factor @ 4% (WEF September 26, 2008) for every year falling short of 58 years. In case of death / disablement, the above restrictions don’t apply
A person can take early retirement for many reasons like for example if he is unfit to work due to permanent total disability
The minimum pension is Rs 1,000 per month, while the maximum is Rs 7,500
Pension is admissible to dependents, widows, children, dependent parent or nominees. After the demise of an employee, family pension is paid to the wife. Even children get pension till the age of 25. There is no minimum period of service for family pension. If the member is not married the nominee gets the pension till death
A noble feature of EPS is that a child with permanent disability gets the pension till the death
It wouldn’t be out of place to mention here that government also contributes to the Employee Pension fund. The government contribution however is restricted to 1.16% of your basic pay.
(The writer is a former banker, and currently teaches at Manipal Academy of Banking, Bengaluru)