How Much Pension Will I Get Through the Employee Pension Scheme (EPS)?

In one of the recent articles we had taken a detailed look at Employee Provident Fund or EPF. One of the components of this EPF is the Employee Pension Scheme or EPS. We covered what the EPS is and what it is supposed to do. But, we never talked about how much pension we might get after we retire. The purpose of this short article is to give you a relistic idea of how much pension you may get post retirement through this EPS Scheme.

To Refresh our Memory - What is Employee Pension Scheme?

The EPS is a saving scheme wherein a small sum of money is accumulated on a monthly basis over the duration of employment so that, it can help the employee receive a pension after retirement.

When can one start Receiving Pension from EPS?

An employee can start receiving pension under EPS only after rendering a minimum service of 10 years and attaining the age of 58 or 50 years.

Points to Remember:

1. No pension is payable before the age of 50 years.
2. Early pension — that is an employee receiving after completing 50 years of age but before 58 years is subject to a reducing factor @ 4% for every year falling short of 58 years. In case of death / disablement, the above restriction is not applicable.
3. The pension amount is payable to the eligible subscriber till he survives. On the death of the employee, members of his family—whom he has nominated—are entitled for the pension.

What Happens if I Resign before completing 10 years of service?

If you resign before completing 9 years and 6 months of service, you get the “withdrawal benefit” which depends on your monthly salary and the no. of years of service. EPS always rounds up the no. of years. So, if you worked for 4 years and 7 months, you will be considered as 5 years. You can opt for the withdrawal option only if you are less than 50 years old.

No. of Years of Service	Multiplication Factor
1	1.02
2	1.99
3	2.98
4	3.99
5	5.02
6	6.07
7	7.13
8	8.22
9	9.33

Note: The amount you will receive is not based on the balance in your EPS corpus. It is based on your basic salary and no. of years of service that can be considered after rounding up as per the table above.

For Ex: An employee exits from employment after 3 years and 8 months of service with a basic salary on exit Rs. 5,000 - They will get Rs. 19,250 (5000 * 3.99)

If you have crossed the 50 year mark or the 10 years of service then this withdrawal option is not available for you.

What can I do if I have crossed the 10 years of Service?

If total service of employee is more than 9.5 years and age of employee is less than 50 years of age, they can only claim a scheme certificate. They can add services at different companies to calculate total service and can get pension from the age of 50 years onwards. If they have the scheme certificate for all services, they may apply directly at EPF office which covers the area. They needs to fill up Form 10-D, get form attested by a Nationalized Bank manager with photo and other required documents which is mentioned in the Form-10D to avail the Pension benefit.

So, If you are switching jobs you can get this Scheme Certificate and avail the pension option when you retire.

What is the Maximum Pension One Can Get from EPS?

Under EPS, the monthly pension is decided on the basis of ‘pensionable service’ and ‘pensionable salary’.

Here:

Pensionable Salary = Last Drawn Basic Monthly Salary
Pensionable Service = No. of years of Service you put in as an employee of your company

The formula to calculate pension is:

Monthly pension = (Pensionable salary X Pensionable service) ÷ 70

Did you read the article on EPF carefully? Did you note that the upper limit on EPS contribution is based on a Monthly Basic Salary of Rs. 6,500/-?

So, if the amount contributed every month is on a salary of Rs. 6,500/- what do you think will be considered as Pensionable Salary for the above formula???

As Expected, the pension is calculated on a monthly salary of Rs. 6,500/-

So if you have worked for say 35 years, your monthly pension will come to Rs. 3250

(6500 * 35) / 70 = 3250

Note: Rs. 3,250 is the maximum pension one can get per month through the EPS Scheme.

Are you disappointed after seeing this number?

Unfortunately, So was I.

This amount is too less. This amount wouldnt be enough for an individual in todays cost of living. Imagine the cost of living after 25 or 30 years when we retire?

To Make Matters Worse - If you invest this same Rs. 541 in a recurring deposit with a reputed Bank that offers compound Interest (That is compounded on monthly basis) at 8% interest rate per annum for 35 years, you would get Rs. 12,40,990 as maturity value.

If you purchase an Annuity Plan (A Fancy Term for a product that will pay you monthly pension) that offers 7% returns per annum, the monthly pension you will get is approximately Rs. 7,200/-

As you can see - The amount you will get is almost double of what pension you may get through EPS.

Sadly, all these limits and schemes were formulated in the 1980's when this Rs. 6,500/- per month was considered an extravagant salary that people yearned for. It is high time the Government of India woke up to the current state of affairs and revised all these numbers that make no sense today. The purpose of all these schemes is to help the Salaried Class of India survive when they retire after 25-30 years of service. Unless, these numbers are revised, there is practically no use in contributing to these schemes whatsoever...

My Thoughts on this:

Though the idea based on which these schemes were formulated need to be commended, they need to be tweaked in order to be effective. I would strongly suggest you plan for your retirement meticulously and ensure that you have a happy retirement. There have been multiple articles in our blog that cover Retirement Planning. You can visit the Retirement Planning Home Page of our blog by Clicking Here

Happy Retirement!!!

Employee Provident Fund - Demystified

Employee Provident Fund or EPF is by far the most common Retirement Planning option for the salaried class of India and in some cases the only Retirement Option. Even though most of the Salaried employees of India or should I use the more popular term "The Middle Class" have an EPF account and contribute towards it monthly, not many of us know what it is and how it operates. This article is one among the many that are coming up in this blog that can help you learn about Employee Provident Fund or EPF.

Let’s get started, Shall We???

What is the Employee Provident Fund (EPF)?

The EPF is created by the Employees Provident Fund Organization (EPFO) of India, a statutory body of the Indian Government under the Labor and Employment Ministry. It states that an organization having 20 or more permanent employees on its payroll, should register with the EPFO.

A Provident Fund is a fund that is created, through contributions, to provide financial support to individuals in their future (Specifically for post-retirement). The Employee Provident Fund is just such a fund. Contributions are made on a monthly basis, by both employees and employers, thereby encouraging employees to save a portion of their salary each month. Investments made by millions of employees across India are pooled together and invested by a trust.

The EPF is a tax free investment instrument for the salaried class. Interest earned on it is tax free, and returns are also not taxed. You also get a deduction under Section 80C for contributions made towards your EPF.

Do You want to take a guess at the value of the total corpus of the funds accumulated by the EPFO???

It is more than Rs. 3 Trillion...

Where does your Monthly EPF Contribution Go?

Currently, the following three schemes are in operation under the EPF Act of 1952, and it is into these trusts that your monthly contributions go. These are as follows:

1. Employees Provident Fund Scheme (1952)
2. Employees Deposit Linked Insurance Scheme (1976)
3. Employees Pension Scheme (1995)

In a majority of the cases, EPF, EPS and EDLIS are calculated on the basis of your Basic + Dearness Allowance (DA). Others consider your Basic + Dearness Allowance + Cash value of food allowance and retaining allowances if any as well.

What is the Employees Pension Scheme (EPS)?

This part of your monthly contribution is targeted towards offering pension on disablement, widow’s pension and pension for nominees. It is financed by diverting 8.33% of your monthly contribution away from the EPF and towards the EPS instead. This is kept to a maximum of 8.33% of Rs. 6,500, or Rs. 541. The government also contributes the equivalent of 1.17% of your monthly contribution towards the EPS.

Most people don’t realize this upper limit and think that it is a fixed % of their Basic Salary whereas the government has set up an upper limit. So, if your Basic Salary is more than Rs. 6,500/- per month, only Rs. 541/- will go towards EPS.

The purpose of the EPS is to provide for the following:

1. Superannuation Pension: A member who retires after 20 years of service and at or after the age of 58 years
2. Retiring Pension: A member who has rendered eligible service of 20 years and then retires before attaining the age of 58 years
3. Short Service Pension: A member who has rendered more than 10 but less than 20 years of eligible service
4. Permanent Total Disablement Pension: A member who is permanently and totally disabled and is unable to work/earn

What is the Employees Deposit Linked Insurance Scheme (EDLIS)?

Under this scheme, employees receive Life Insurance cover. The cost of the scheme is borne by the employer, but the life insurance received under this scheme is limited to Rs. 1,30,000/- (Which I personally feel is very low)

Most employers opt out for the EDLI and choose to have a group life insurance cover for their employees. This works out better for the employees and does not increase any cost to the employer. Usually the coverage provided under this scheme is a simple multiple of the annual salary of the employee (based on his/her grade/designation) and hence will be much higher than the fixed Rs. 1.3 lakhs cover that EDLIS offers.

A Sample Calculation - Of How Your EPF is Split Up and Saved:

Every Month a portion of your Salary is deducted towards EPF - This will be referred to as "Employee Contribution". Your employer too contributes a certain amount every month towards EPF - This will be referred to as "Employer Contribution".

Employee Contribution: 12% of your Basic Salary + DA (Comes out of your Salary)

Employer Contribution: Another 12% of your Basic Salary + DA (Comes out of your Employers Pocket)

In most corporate companies these days, this Employer Contribution too is considered as part of your total CTC (Cost To Company) and hence can’t really be considered as coming out of your Employers Pocket

The Employee Contribution goes entirely towards the EPF Scheme.

The Employer Contribution gets split up as follows:

1. 3.67% into EPF
2. 8.33% into EPS
3. 1.1% EPF Administration Charges
4. 0.5% into EDLIS (If Applicable)
5. 0.01% EDLIS Administration Charges

If you remembered to add up the numbers the total comes up to 13.61% which is higher than the 12% Employer contribution that I just mentioned a few lines ago. That is because:

* The 1.1% EPF Admin Charges is borne by your Employer and is not part of your CTC
* The 0.5% contribution to EDLIS or 0.01% EDLIS Admin Charges too are borne by your Employer (If Applicable) and is not part of your CTC.

So, if you just sum up the 3.67% that goes into your EPF and the 8.33% that goes into your EPS - The Total comes up to 12% doesn’t it?

In cases where the Basic Salary of an employee is more than Rs. 6,500/- most employers limit the EPS contribution to Rs. 541/- and contribute the remaining towards EPF.

For ex: If your Basic Salary is Rs. 10,000/-
12% of your Basic Salary works out to Rs. 1,200/-
3.67% of your Basic Salary works out to Rs. 367/-
8.33% of your Basic Salary comes to Rs. 833/- which is higher than the limit of Rs. 541/-

So, your Employer will contribute Rs. 541/- towards EPS and contribute Rs. 659/- towards EPF (Rs. 367/- + Rs. 292/-)

In Essence, the employer will contribute 12% of your Basic just as mentioned above with the simple difference being the fact that the EPS component is constrained by an upper limit and the remaining usually goes towards your EPF.

What Happens to the Money that is accumulated in the EPF Corpus?

The EPFO usually lends loans (To Government Entities) or uses the money to finance Government Projects. As a Result, the Government offers a fixed Rate of Interest on the money accumulated in our EPF Corpus. So, not only does your corpus grow every month (with additional monthly contributions) but also earns a fixed and regular interest.

When is the Interest Calculated/Credited in our EPF Account?

The Interest is usually Calculated as well as Credited into your EPF Account at the end of each Financial Year. Compound interest is paid on the amount standing to the credit of an employee as on 1st April of each year.

One Last Word of Caution:

There is a clause in the PF guidelines that allows employees to choose Rs. 6,500/- as the upper salary limit (Just like EPS) to calculate the EPF contributions as well. So, companies that offer PF as a benefit over and above the salary package to the employee may opt to put this upper limit of Salary on PF calculations thereby reducing your PF contribution every month. Firms that offer EPF as a total benefit in the "cost-to-company or CTC" mode wont bother about this because even their share of PF is considered part of your salary and hence they wont mind paying the higher PF amount

Hope this article covered all the basics you needed to know about the Employee Provident Fund Scheme. Watch out for more articles on EPF!!!

Market Ratios

Market Ratios are useful in measuring investor response to owning a company’s shares and also the cost of issuing shares to the public. Almost all of these ratios can be used to take decisions as to whether we should invest in a company’s stock or not. The ratios that fall under this category are:

1. Earnings Per Share (EPS)
2. Payout Ratio
3. Dividend Cover
4. P/E Ratio
5. Dividend Yield
6. Cash Flow Ratio
7. Price to Book Value Ratio (P/B or PBV)
8. Price to Sales Ratio
9. PEG Ratio

Earnings Per Share:

EPS is a very good indicator of a company's performance. It measures the amount of earnings per each outstanding share of a company’s stock.

Formula:

EPS = Net Profit / Total No. of Common Shares or

EPS = Net Income / Total No. of Common Shares

Here the EPS calculated from the Net Profit would always be lesser than the one calculate from the Net Income but invariably both give us a good measure of the ability of the company to grow and generate additional revenue.

Usually EPS values are compared between companies or between values of the same company over a period of years.

Payout Ratio:

Payout Ratio a.k.a Dividend Payout Ratio is the ratio that tell us the amount of dividend paid by the company to its common stock holders in comparison to its total income for the same time period. This percentage tells us how much dividend is paid by a company in comparison to its total revenues.

Formula:

DPR = Dividends Paid / Net Income for the same time period

A Good DPR is always a sign of a well performing company. If two stocks from the same industry are picked for comparison, the one with the higher DPR always scores more than the one that has little or no DPR.

Dividend Cover:

Dividend Cover is actually the inverse of the Dividend Payout Ratio. It is calculated by comparing the Earnings Per Share (EPS) and the actual dividend paid out per share.

Formula:

DC = EPS / Dividend Paid

P/E Ratio:

P/E Ratio also called Price to Earning Ratio refers to the price paid for a share relative to the annual net income/profit earned by the company per share. The P/E ratio is an indicator of how much investors are willing to pay for a company's share. A higher P/E ratio means that investors are willing to pay a higher premium for a company’s share in comparison to its actual value. A stock with a higher P/E is more expensive than the one with a lesser P/E.

Formula:

P/E = Market Price Per Share / Diluted EPS

The P/E value of a share keeps changing everyday based on the market price fluctuation of the company’s stock.

Dividend Yield:

The Dividend Yield refers to the ratio that helps us identify the dividend income generated by a company for its share holders. A good dividend yield means that the company is doing good business and is also sharing its profits with its investors/share holders.

Formula:

Dividend Yield = Dividend Per Share / Current Market Price per Share

Or

Dividend Yield = Total Dividend Paid / Market Capitalization

Cash Flow Ratio:

The Cash Flow Ratio is used to compare a company's market value to its cash flow.

Formula:

CFR = Market Price per Share / Present Value of Cash Flow per Share

Cash Flow per Share = Total Cash Flow / Total No. of outstanding Shares

Price to Book Value Ratio:

The PBV is a financial ratio that is used to compare a company’s book value to its current market price. Book value denotes the portion of the company held by shareholders.

Formula:

PBV = Market Capitalization / Total Book Value as per the Balance Sheet

Or

PBV = Market Value per Share / Book Value per Share

Book Value per Share = Total Book Value / Total No. of outstanding shares

A point to note here is that, PBV ratios do not directly provide us any information on the company’s ability to generate profits for itself or its shareholders. It gives us some idea of whether an investor is paying too much for what would be left if the company were to go bankrupt immediately.

Price to Sales Ratio:

The Price to Sales Ratio (PSR) is a valuation ratio for stocks that is similar to the EPS ratio we saw earlier in this article. It is used to identify how much of revenue is generated compared to the company’s market price.

Formula:

PSR = Market Capitalization / Total Revenue

Or

PSR = Current Market Price per Share / Revenue per Share

Revenue per Share = Total Revenue / Total No. of Outstanding Shares

PEG Ratio:

Price/Earnings to Growth Ratio is used to determine the relative trade-off between the price of a stock, the EPS and the company’s expected growth. In general, the P/E ratio is higher for a company with a higher growth rate. Thus, using just the P/E ratio would make high growth companies appear to be overvalued in comparison to its peers. It is assumed that by dividing the P/E ratio by the earnings growth rate, the resulting ratio is better for comparing companies with different growth rates.

Formula:

PEG Ratio = PE Ratio / Annual EPS Growth

PEG ratio is a widely employed indicator of a stocks possible true value. Similar to PE ratios, a lower PEG means the stock is undervalued. The PEG is favored by many over the PE ratio because it also considers the company’s growth prospects. The PEG ratio of 1 is sometimes said to represent a fair trade-off between the values of cost and the values of growth, indicating that a stock is reasonably valued given the expected growth. A crude analysis suggests that companies with PEG values between 0 to 1 may provide higher returns