Can you withdraw the pension share from your EPF?

It’s essential to understand the distinction between EPS and the Employee Provident Fund (EPF). An employer typically deducts 12% of your basic salary plus dearness allowance, if any, from your monthly salary to contribute to the EPF account. This salary may also include any retaining allowance and the cash value of food concessions, if applicable.

Your employer is required to chip in an equal percentage amount. However, from the employer’s 12% contribution, 8.33% is allocated to the EPS. Importantly, even if your basic pay exceeds ₹15,000, the maximum pension contribution will be capped at 8.33% of ₹15,000 which amounts to ₹1,250. This ₹15,000 pensionable salary is subject to future revisions.

For example, if your monthly pay is ₹15,000, you and your employer would each contribute ₹1,800 each month to the EPF, totalling ₹3,600. Since your basic pay is at the ₹15,000 limit, 8.33% ( ₹1,250) from the employer’s contribution will go toward the EPS. The remaining 3.67% from the employer’s contribution will be allocated to the EPF, which earns a fixed interest rate of around 8%, determined annually. Meanwhile, the entire employee contribution goes directly into the EPF.

After an amendment on 1 September 2014, new member employees earning a basic pay of more than ₹15,000 per month cannot be a part of the pension scheme. If that’s the case, the entire employer’s contribution will go towards the EPF. If you enrolled with EPF before September 2014, you could continue putting 8.33% of your employer’s contribution in the pension scheme.

To be sure, such employees who contribute towards EPS and have an eligible contribution service of 10 years or more will get a defined pension at age 58, or can opt for a reduced pension starting at 50. The pension amount will be based on a calculation as defined by the Employee Provident Fund Organisation.

The Hindustan Times reported that the EPFO is considering eliminating the cap on the share of employees’ salary contributed towards pension to allow those who want a higher retirement payout to contribute more money.

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Pension calculation

The pension scheme was designed to provide fixed retirement pension on retirement for low-salaried workers. Unlike EPF, where the amount you receive is based on your contribution and the interest earned on it, the pension scheme is a ‘defined contribution defined benefit’ social security scheme as opposed to just a defined contribution scheme.

Here’s how the monthly pension amount is calculated. Take the average salary earned over the last 60 months, multiply it by the number of years served as ‘pensionable service’ and then divide it by 70, subtracting any non-contributory period.

To illustrate, if someone is retiring now and qualifies for the benefit, here’s how much pension they would receive. If the person has an average salary of ₹15,000 per month, as per the above calculation, and has a pensionable service of 15 years, the person would get ₹3,214 per month. Keep in mind that the maximum pensionable salary is capped at ₹15,000 per month.

Adarsh Vir Singh, founder of Nidhi Niyojan and an expert in provident fund matters, said apart from a contribution of 8.33% of wages, the pension fund corpus also includes 1.16% of wage from the central government through budgetary support.

This pension becomes eligible when the employee completes at least 10 years of eligible service. EPFO counts years on a half-yearly basis, meaning someone who completes 9.6 years of service would qualify. Service is those years in which he was contributing towards the EPS. Also, pensionable service will be increased by a weight of two years, where employees reach the agof 58 and have completed pensionable service of 20 years or more.

Anurag Jain, co-founder and partner of ByTheBook Consulting LLP saidin case of the death of the employee, the family would get a pension equal to the monthly member’s pension that would have been payable if the member retired on the date of death or ₹1,000 per month, whichever is higher. This would benefit the member’s spouse, sons, and daughters (including legally adopted children), subject to certain prescribed conditions.

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Early withdrawal

If a subscriber to EPF goes to his account using the EPFO site, they will see their funds split into three categories: employee share, employer share, and pension share. If a person is unemployed for more than 60 days, they can withdraw the employee and employer’s shares. Even when employed, there are provisions to take out a part of the corpus for things like buying a house, medical purposes, marriage, etc.

However, the pension portion is bound by separate rules. If the pensionable service was less than 9.6 years (114 months), early withdrawal of the corpus is allowed. Once the 10-year mark is reached, the pension share cannot be withdrawn. This means that after completing 9.6-year mark, the pension share is stuck till at least age of 50. After 9.6 years of eligible service, the employee becomes eligible for the defined benefit pension benefits.

“Employees who had rendered pension service of less than 9 year and 6 months have the option to withdraw their EPS contributions by filling online form 10C in EPFO portal,” said Singh.

However, there’s an option to opt for an early pension starting at age 50 instead of 58 with the drawback of a reduced pension amount. “The amount of pension shall be reduced at the rate of 4%, for every year the age falls short of 58 years,” Jain said. For example, this would mean a pension of Rs2,186 per month at age 50, which is 32% lower than the amount to be received at 58. This reduce amount will remain constant throughout retirement.

“Likewise employees who had attained 58 years of age and otherwise eligible for pension may be allowed to defer pension later than 58 years but not beyond 60 years in such a case, pension amount will get increased by 4% subject to continued pension contributions till the deference period,” said Singh.

If an individual opts for a premature withdrawal of lumpsum before reaching the 10-year mark, the amount received will be calculated using Table D of the EPF Act. For instance, if one withdraws their pension share on the sixth year (on the 72nd month), and their pay was ₹15,000 at that time, the amount will be calculated as Rs.15,000 multiplied 6.07 (the multiplier specified by EPFO according to each month by the EPFO), which is Rs.91,050. Interestingly, if the basic pay was ₹15,000 for these six years with a contribution of ₹1,250 (8.33%) each month, the contribution would be ₹90,000.

“Withdrawal of EPS after putting 9 years of service isn’t a viable financial option as you hardly get even the contributed amount back, thereby keep on accumulating pension which will ultimately be a saviour at the retirement age,” said Singh.

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