Good news for EPF Scheme subscribers! The Central Board of Trustees (CBT) of the Employee Provident Fund has approved a proposal for the restoration of commuted value of the pension to the Pensioners after 15 years of drawing commutation under the EPS 1995 scheme.
The move would benefit the pensioners who had opted for commutation and got a lump-sum amount at the time of retirement before 2009. The provision for commutation of pension was withdrawn by the EPFO in 2009 for non-govt employees.
Let’s now understand – What is Employees Pension Scheme? What is meant of Commutation of Pension? How much Pension amount can be Commuted? What is the latest rule or amendment related to EPS Pension Commutation?..
What is EPS?
If you are a salaried person and contributes to EPF Scheme, you may kindly take out your monthly pay-slip and check, you can notice that every month 12% of your “salary” is contributed towards EPF account. Your total monthly contribution is routed towards Employees’ Provident Fund.
Your employer also contributes 12% of the salary to your EPF a/c. But your employer’s monthly contribution is routed towards various components of PF.
Out of this 12% of your employer’s monthly contribution, 8.33% goes towards EPS (Employees Pension Scheme) and only 3.67% is invested in Employees’ Provident Fund (EPF). So, you contribute 12% of your basic salary and your employer contributes 3.67% of your basic salary towards EPF deposits.
The amount that goes into EPS 95 is capped at Rs 1250 a month as the pensionable salary is also capped at Rs 15,000 a month. An employee can withdraw the amount that was diverted to EPS anytime on leaving the job but only before completion of 10 years.
Else, the employee gets a lifetime pension only if he or she is a member of EPS95 for at least ten continuous years of service. From the age of 58, the pensioner starts getting monthly pension after submitting Form 10-D to the Employees’ Provident Fund Organisation( EPFO).
What is Commutation of Pension?
If an employee has a service period of more than 10 years or retires (58 years), he/she can opt for commutation of pension. Meaning, a portion is paid as a lump sum (advance) to the pensioner (employee) while on the balance, the periodic pension is payable.
In simple terms, commutation means a lump sum payment in lieu of periodic payments of pension. In such a case, the amount of pension payable will be lower than the amount of pension without any commutation. (Commuted value is the net present value of a future financial obligation.)
For example, if the monthly pension is arrived at Rs 10,000 without commutation then employee will get Rs 10,000 pm as pension for life-long.
In case, an employee goes for a certain commuted value ie lump-sum part-withdrawal in advance then the pension gets reduced to say Rs 7,000 instead of Rs 10,000.
EPS Pension Commutation – Latest Amendment
The EPF members can opt for 1/3 rd of EPS Pension as commutation. Also, the latest amendment seeks the restoration of commuted value of the pension to the Pensioners after 15 years of drawing commutation under the EPS 1995 scheme.
Meaning, the latest amendment seeks to restore the original amount of pension after 15 years equal to the same amount as it would have been without commutation.
Let us consider your monthly pension is Rs.15,000 (fixed after calculation), then the commutation is allowed on 1/3 of such pension.
Hence, 1/3 of your monthly pension is Rs.5,000 (Rs.15,000/3).
The yearly pension amount comes to Rs 60,000 (5,000*12). The commuted value of pension for 15 years is Rs 9,00,000 (60,000*15).
The EPF member can make advance lump-sum withdrawal of Rs 9 lakh and he/she will get reduced pension of Rs 10,000 (2/3rd of Rs 15,000) as monthly pension for 15 years.
After 15 years, the monthly pension amount will again be restored to Rs 15,000.
Should you go for EPS Pension Commutation?
If you are a pensioner now, should you opt for Commutation of EPS pension?
The Commutation of Pension may appear to be a better option, if you are in in a position to deploy the funds (lump-sum withdrawal) on your own for much better returns. It can also be beneficial to meet any important financial obligations that you may have at the time of retirement.
If you opt for commutation of EPS pension, you get a lump-sum amount but reduced pension is payable every month for the next 15 years. However, your pension amount gets restored after 15 years. So, you need to consider ‘opportunity cost’ and inflation rate before you take final decision.
I believe that 1/3 rd of total pension that is commuted is a tax-free amount in the hands of Pensioners.
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(This post is based on the limited available information. If required, the above information will be edited/updated). (Post published on – 22-August-2019)