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New EPS Rule form EPFO, Impact on Lump Sum Withdrawal Amounts for Early Exit

New EPS Rule form EPFO, Impact on Lump Sum Withdrawal Amounts for Early Exit

Change in EPS Rule for Calculating Lump Sum Withdrawal Amount on Early Exit: Who Benefits, Who Loses?

The Ministry of Labour and Employment has recently issued two significant notifications amending the rules under the Employees’ Pension Scheme (EPS). One notification addresses the lump sum payment from the EPS scheme for members who exit before completing 10 years of service. The other focuses on employees eligible to receive pensions under the Family Pension Scheme, which existed before EPS. These amendments, issued on June 14, 2024, bring clarity and some changes to the calculation methods that affect different groups of employees.

Lump Sum Withdrawal from EPS

The revised ‘Table D’ is the primary focus of the first notification. This table is crucial as it determines the lump sum payment an employee can receive if they leave the pension scheme before completing ten years. According to Puneet Gupta, Partner at People Advisory Services, EY India, the amended ‘Table D’ will provide clarity on the calculation of lump sum payments for members with incomplete service periods.

Previously, if an employee was a member of the pension scheme for, say, 4 years and 7 months, the lump sum benefit was calculated as if they had completed 5 years of service. Under the new rules, the benefit is calculated based on the exact number of months worked, in this case, 55 months. This change may slightly reduce the benefit amount.

Understanding EPS Eligibility

Under the EPS rules, a member is eligible to receive a pension only after completing 10 years of service. This means that a member must contribute to both the EPS and EPF accounts for 10 years to qualify for a pension. If an employee exits the EPS scheme before completing this period, they receive a lump sum payment instead of a pension.

Calculating Lump Sum Benefits: The New ‘Table D’

The revised ‘Table D’ calculates lump sum withdrawal benefits based on the exact number of service months. Previously, the calculation was based on the number of completed service years.

Gupta illustrates the new calculation method with an example: if an EPS member completes 6 years and 8 months (80 months) of service, the lump sum benefit is now calculated by multiplying the exit wages (e.g., ₹15,000) by the return on contribution from ‘Table D’. For 80 months, this return is 6.78, resulting in a benefit of ₹101,700 (₹15,000 x 6.78).

Under the old rules, service exceeding six months was rounded up to a full year. Therefore, 6 years and 8 months (84 months) would have been considered as 7 years, and the benefit would have been ₹106,950 (₹15,000 x 7.13). This change means employees with service periods of X years and 7 months will lose out compared to the old system, while those with X years and 5 months of service will benefit under the new rules.

Who Benefits and Who Loses?

The new rule benefits employees with service periods that include up to 5 months beyond full years, as they now receive a proportionate benefit for those months. Conversely, employees whose service periods include more than 5 months beyond full years might see a reduction in their lump sum withdrawal amounts. This change ensures a more precise calculation of benefits, reflecting the actual time worked.

Example Calculation of Lump Sum Benefits

Here’s an example under the new rules: an employee with a basic salary of ₹15,000 who resigns after working for 6 years and 8 months will have their benefit calculated based on 80 months of service. The benefit is ₹101,700 (₹15,000 x 6.78). Under the old rules, this would have been rounded to 7 years (84 months), resulting in a benefit of ₹106,950 (₹15,000 x 7.13).

Amended ‘Table B’ for Family Pension Scheme

The second notification amends ‘Table B’ under the Family Pension Scheme, which predates the EPS. This amendment affects employees who were covered under the Family Pension Scheme before November 16, 1995, and have more than 34 years of service but less than 42 years. The revised table now includes factors for calculating pension benefits for these members, aiding in estimating EPFO’s pension liabilities.

Overview of EPS Advance Withdrawal Changes

Under the new guidelines, the EPFO has completely revised the statistical table used for calculating EPS advance withdrawal payments. This change will result in a reduction in the amounts received by employees who withdraw their EPS contributions before completing ten years of service. Previously, service duration was calculated in yearly increments, but now it will be calculated based on the exact number of months worked.

Updated Calculation Method for EPS Withdrawals

The Ministry of Labor has amended Table-D of the 1995 EPS Act to reflect these changes. According to EPFO regulations, employees who complete a minimum of ten years of EPS service are eligible for a monthly pension upon reaching the age of 58. Those with nine years and six months of service are rounded up to ten years, but those with less service are not eligible for a pension. Employees who do not complete ten years of service can withdraw their EPS contributions.

Impact on Migrant Workers and Frequent Job Changers

These changes will notably affect migrant workers and young professionals who frequently change jobs. Many such individuals tend to withdraw their EPS amounts after working for two to three years in a single organization. EPFO officials advise against withdrawing EPS contributions upon changing jobs or resignation. Instead, they recommend transferring the service to the new organization to qualify for a higher pension eventually.

Detailed Breakdown of EPS Contributions

Each employee’s salary contribution towards EPS is 12%, matched by the employer. Of the employer’s 12% contribution, 8.33% goes into the EPS, and the remaining 3.67% into the employee’s EPF account. Since 2014, the EPFO has capped the maximum salary for EPS contributions at ₹15,000. Therefore, 8.33% of ₹15,000 (₹1,250) is directed towards EPS.

Example Calculation Under New Rules

Consider an employee with a basic salary plus DA amounting to ₹15,000 who resigns after working for six years and seven months. Under the old rules, this would be rounded up to seven years, and the payout calculated accordingly. For a salary of ₹15,000 and seven years of service, the payout ratio was 7.13, resulting in a total of ₹106,950 (₹15,000 x 7.13).

Under the new rules, the exact number of months worked is considered. For six years and seven months, or 79 months, the payout ratio is now 6.69. Thus, the total amount received would be ₹100,350 (₹15,000 x 6.69). This new monthly-based calculation method will result in lower advance withdrawal amounts for employees.

Conclusion

The recent amendments to the EPS rules bring more precision to the calculation of lump sum benefits for early exits and address pension benefits for long-serving employees under the old Family Pension Scheme. Employees must understand these changes to make informed decisions about their retirement planning. For personalized advice, consulting EPFO officials or reviewing the updated regulations is recommended.

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