Government proposes doubling of Employee Pension SchemeThe government has proposed a doubling of the minimum pension under the Employees Pension Scheme (EPS) from Rs 1,000 per month to Rs 2,000 per month. The EPS is a component of the Employees Provident Fund (EPF).

How the EPS works

Employees who work in firms with 20 employees or more and earn less than Rs 15,000 per month are mandatorily covered by the Employees’ Provident Fund or EPF. Employees on higher salaries can also be covered under the scheme but this coverage is not mandatory. The Government has proposed a hike in the mandatory wage ceiling from Rs 15,000 to Rs 21,000 per month.

Each month both the employer and the employee contribute 12% of the basic salary and dearness allowance to the EPF (24% in total). An 8.33% of the employer’s contribution is allocated to the EPS. This amount is used to pay you a pension, after attaining the age of 58.

The pension is paid according to the following formula:

Pensionable Salary * No of years of service/70.

The maximum pensionable salary is restricted to 15,000 per month. The Supreme Court has recently ruled that employees can increase this amount with the employer’s consent to get a higher pension. The rules further stipulate that employees must have completed at least 10 years of service to be eligible for the EPS pension.

Minimum Monthly Pension

Changes made to the EPS in 2014 grant subscribers a minimum monthly pension of Rs 1,000, regardless of how much they have contributed to the scheme. Thus for example, if your salary was Rs 5,000 per month and you have worked for just 10 years, the formula will give you a pension of Rs 714 per month. However, the minimum pension will kick-in at this juncture and raise this amount to Rs 1,000 per month.

The proposed changes will further hike this amount to Rs 2,000 per month. The move is expected to benefit about 40 lakh people. The government may have to provide funding for this amount to the Employees Provident Fund Organisation (EPFO) which supervises the EPS. This is expected to cost the government about Rs 3,000 crore per annum.

RupeeIQ take

This is a welcome move and addresses the burning question of old age poverty in India. However, it only affects the organised sector. It is estimated that an 85% of India’s workforce is in the unorganised sector. This sector is targeted by the Atal Pension Yojana (APY) rather than the EPS. The APY also has a minimum pension of Rs 1,000. In order to treat both types of workers equally, the APY pension should also be raised in sync with the EPS.

Author
Neil Borate

Neil Borate is Deputy Editor, RupeeIQ. He can be contacted at neil@rupeeiq.com.