Employee Pension Scheme—All You Need To Know

Those who have joined the workforce recently must have come across the terms Employee Pension Scheme (EPS) and Employee's Provident Fund (EPF). However, newcomers could be confused if they don't understand them clearly and see these deductions in salary.

The EPS scheme was introduced in 1995 to help employees in the organised sector. Those eligible for the EPF scheme are also entitled to EPS. 

Both EPS and EPF are governed by the Employee's Provident Fund Organization (EPFO).
The EPS scheme is to provide pension to employees of the organised sector as a way of social security after their retirement at 58 years. While EPF applies to all organisations with over 20 employees, the EPS scheme is applicable to those who are members of EPFO. 

“Both the employer and the employee contribute 12 per cent each of the employee's basic salary and dearness allowance towards EPF. The employee's entire share is contributed towards EPF,” says Arijit Sen, a Sebi-registered investment advisor and co-founder of Merry Mind, a Kolkata-based financial advisory firm. 

However, 8.33 per cent of the employer's share goes towards EPS and 3.67 per cent goes towards EPF contribution every month. Even if an employee’s basic monthly salary is over Rs 15,000, the maximum pensionable salary considered while calculating pension will be Rs 15,000 per month. For example, 8.33 per cent of Rs 15,000 or Rs 1,250 per month will go towards EPS. 

“While the EPF would give you a lump sum retirement benefit, the EPS scheme would give you lifelong income as pension. Thus, it forms a significant part of one’s retirement kitty. EPS is a government-run initiative; hence, returns are guaranteed. You are entitled to receive your EPS pension on total disablement during your service,” says Sen. 

Let us now look at some features of EPS. 

Assured Returns: The EPF returns are assured as it is a government scheme. 

Premature Withdrawal: If an EPFO member has completed 10 years of service and is aged 50 but less than 58, he can withdraw an early pension, but at a reduced interest rate. 
Withdrawal Without Eligibility: If a person didn’t complete 10 years of work before reaching 58, he/she may withdraw the entire amount using form 10C. However, he won’t get pension. 

Pension to a deceased person’s family member: A family member is eligible for pension benefits under the following circumstances. 
•    If the member dies in service and the employer has deposited funds in the EPS account for at least a month. 
•    In case the member has completed 10 years of service and dies before age 58 
•    If the member dies after the commencement of the family pension 

The following are the types of pension available under EPS for widows, children, and orphans. 

Widow pension: The widow or widower will get a pension after the member's death or remarriage.

Children's pension: If the member dies, the surviving children will receive a pension. It is in addition to the widow's pension and is paid until the child attains 25 years. Up to two children are eligible. 

Orphan pension: Both children are eligible for pension if the member and the spouse die. The amount is 75 per cent of the monthly widow pension. A maximum of two children are eligible for this benefit. 

Reduced pension: If the member has completed 10 years of service and is less than 50, he or she can withdraw early pension, but the amount is cut by four per cent each year. 

EPF Withdrawal Rules

In 2022, the EPFO revised several rules related to provident fund (PF) account withdrawals. These revisions are to provide subscribers easy access to PF funds facing financial difficulties due to the coronavirus pandemic. 
According to the new rules, PF account holders can withdraw money equivalent to three months of their basic salary plus dearness allowance or 75 per cent of the net balance in their PF or EPF account, whichever is lower. It will be considered a non-refundable deposit. Withdrawal claims can be raised online and usually settled within three working days. However, offline claims can take up to 20 days. 

EPF Withdrawals 2022

Here are 10 important rules about EPF withdrawal: 
•    The EPF account comprises contributions from the employer and the employee. However, the money in an EPF account cannot be withdrawn during employment. EPF is a long-term retirement savings scheme. The money can be withdrawn only after retirement. 
•    Partial withdrawal from EPF accounts is permitted during an emergency like health crisis, house purchase or construction, and higher education. Partial withdrawal is subject to limits depending on the reason. The account holder can request online for partial withdrawal.
•    Although the EPF corpus can be withdrawn after retirement, early retirement is not considered until the person reaches 55 years. EPFO allows withdrawal of 90 per cent of the EPF corpus one year before retirement, provided the person is not less than 54 years.
•    The EPF corpus can be withdrawn if a person faces unemployment before retirement due to lock-down or retrenchment.
•    The EPF subscriber has to declare unemployment to withdraw the EPF amount.
•    As per the new rule, EPFO allows withdrawal of 75 per cent of the EPF corpus after one month of unemployment. The remaining 25 per cent can be transferred to a new EPF account after gaining new employment.
•    As per the old rule, 100 per cent EPF withdrawal is allowed after two months of unemployment.
•    EPF corpus withdrawal is exempted from tax but under certain conditions. Tax exemption on EPF corpus is permitted only if an employee contributes to the EPF account for 5 continuous years. The EPF amount is taxable if there is a break in the contribution to the account for five continuous years. In that case, the entire EPF amount will be considered as taxable income for that financial year.
•    Tax is deducted at source on premature withdrawal of the EPF corpus. However, if the entire amount is less than Rs 50,000, TDS is not applicable. Keep in mind, if an employee provides PAN with the application, the applicable TDS rate is 10 per cent. Otherwise, it is 30 per cent plus tax. Form 15H/15G is a declaration form, which states that a person's total income is not taxable and thus, TDS is avoidable.
•    An employee does not have to await approval from the employer for EPF withdrawal anymore. It can be done directly from the EPFO, provided the employee's UAN and Aadhaar are linked, and the employer has approved it. EPF withdrawal status can be checked online.