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Scheme can help employees get guaranteed pension throughout retired life

Finer points

Employer and employee each contributes 12% to retirement corpus

Pension payouts under EPS available only for employees who have put in a minimum 10 years of service

Pension payable is calculated on the basis of a formula

How do I secure a regular monthly income after retirement? That’s a vexing financial problem that most Indians of our generation face, after the phasing out of guaranteed pension from the Government. But one guaranteed option that remains and usually flies under the radar, is the Employees’ Pension Scheme 1995. This scheme can help employees with long years of service receive a modest but guaranteed pension throughout their retired life.

Enrolment

All organised sector employees in India who are enrolled with the Employees Provident Fund Organisation (EPFO) automatically become members of the Employees’ Pension Scheme (EPS) as well. Once you enrol in the EPF, your employer deducts 12% of your basic pay plus dearness allowance every month towards your retirement corpus, with your employer making a matching contribution.

While your 12% contribution goes entirely into the EPF account which gives you a lump sum on retirement, 8.33% of your employer’s contribution goes into the EPS to fund your pension payouts post-retirement. The government also adds 1.16% of your pay to the EPS kitty every month.

However, both the employer’s and the government’s EPS contribution on your behalf are subject to a pay cap. The maximum pay on which the EPS used to accept employers’ contributions used to be ₹6,500 per month until September 2014. In a sweeping amendment to the EPS rules in September 2014, this pay cap was revised upwards to ₹15,000 per month. This effectively means that whatever your pay, the money flowing into the EPS kitty every month on your behalf is capped at ₹1,250 per month (8.33% of ₹15,000).

The September 2014 amendment made another critical change as well. It decreed that new employees who enrolled with the EPFO from that month, who earned a basic pay plus DA of over ₹15,000 per month, would not be eligible for EPS benefits. So if you’ve joined the workforce only in the last five years, you are likely to be enrolled only in the EPF and not EPS. This may change after a recent Supreme Court ruling as we’ll see later in this article.

Eligibility

Under the EPF, the government credits interest at a specified rate on your accumulated balance at the end of each financial year. At the time of retirement, your maturity amount from the EPF will be equal to the contributions made by you and your employer plus the annual interest earned. In contrast, there is no annual interest credit to your EPS account. If you have been a regular contributor, the government simply promises to pay a fixed monthly pension to you after retirement.

Pension payouts under EPS are only available for employees who have put in a minimum 10 years of service with an organisation that offers EPF benefits (doesn’t matter if you’ve jumped jobs). If you choose to quit all employment without completing 10 years of service, you are not eligible to receive any pension and you can apply to withdraw your accumulated EPS contributions.

When you switch jobs and transfer your EPF account from one organisation to another, your old organisation is expected to provide a Scheme Certificate detailing your length of service, pay, non-contributing period and so on.

The PF Commissioner records this information over the years to compute your final pension payout. Don’t worry if your online accounts statement from the EPFO does not reflect your EPS balance; it only needs to capture your service details for you to get pension benefits.

What you get

Under the EPS, the government promises to pay you a monthly pension calculated using a specified formula from the age of 58 until your death. Though you can opt for early pension from the age of 50, this requires a steep sacrifice on the amount of monthly pension. The monthly pension payable to you is calculated based on the formula — pensionable salary multiplied by pensionable service divided by 70.

Pensionable salary, for the purpose of this calculation, is your monthly basic pay plus DA averaged over the last 60 months of your service. The pensionable salary is, however, subject to a ₹15,000 per month cap. Pensionable service is the number of years you have been employed until you retire, with the number capped at 35 years. To illustrate, if your basic pay plus DA averaged ₹40,000 a month in the 60 months before retirement and you retire at 58 after working for a total of 20 years and five months, your monthly pension will amount to ₹4,285 per month (₹15,000*20/70).

Court ruling

In October 2018, the Kerala High Court, in response to a petition, struck down the amendments to the EPS made in September 2014. This judgment was upheld by the Supreme Court in April 2019.

This judgment is expected to affect subscribers in three ways. One, employees who joined service after September 2014 and are now contributing to EPF alone, may become eligible for EPS benefits that were so far barred to them. Two, if the salary cap of ₹15,000 on EPS contributions and pensionable salary goes, employees may be able to bump up their pension by asking their employer to contribute a higher sum to the EPS, rather than EPF. Three, they may also get a higher pension because the pensionable salary will then be based on the last 12 months’ average pay rather than the last 60 months.

While all this is good news for employees, they mustn’t count their chickens before they hatch.

The SC ruling is yet to be given effect as the EPFO is unsure how it can implement them. As things stand, the fund may be unable to meet a sudden spike in pension demands from many of its subscribers. The EPFO is reportedly planning to seek a review of this decision.

Q. During the interim Budget in February , the Finance Minister relaxed long-term capital gains tax norms whereby one could invest in two residential properties from the proceeds of sale of a house. I want to know 1) If the two houses must be in the same town or can be in different towns 2) one house can be in a town and another new construction in another town 3) Both from new construction.

KAMALUDEEN M

A. A one-time exemption for individuals and HUF was announced in the Interim Budget in February 2018 and later brought into force. With effect from April 1,2019, if the long term capital gains (after indexation) from sale of house property does not exceed ₹2 crore, the assessee may, at his option, purchase or construct two residential houses in India.

1.It is provided that the residential property be situated in India, hence, it can be situated in the same town or different town as long as it is situated in India

2. One residential house can be purchased in one town and one constructed in another town as long as both the towns are situated in India

3. Both the residential houses can be constructed or both can be purchased at the option of the assessee

4. It is to be noted that this option of purchasing or constructing two residential houses is a one-time option and cannot be exercised in any other year.

Q. I am a senior citizen and would like to open an account in the PMVVY pension scheme soon. I would like to know while filing ITR 1, where the interest or pension income out of the above scheme should find its place?

R. Kesavan

A. Pradhan Mantri Vaya Vandana Yojana (PMVVY) is a social security scheme launched by the government through LIC of India. It is in the nature of an annuity scheme wherein a subscriber is required to pay a lump sum premium amount on subscription.

The scheme pays out to the subscriber on a monthly basis based on the initial contribution.

Annuity scheme payouts are in the nature of pension; however, these do not pertain to any employee-employer related pension thereby not warranting disclosure under “Income from Salaries.”

Hence, income in the nature of pension from PMVVY is to be declared as “Income from Other Sources” in ITR 1 or any other ITR applicable to the assessee.

Q. Sir, I am a retired defence person. My monthly pension is ₹38,000 and my total annual income for FY 2018-19 is ₹4,55,088. The interest from fixed deposits for the FY 2018-19 is ₹1,48,085. Am I eligible to get exemption from tax on the interest arising from fixed deposits, as a senior citizen?

Kulwinder Singh

A. Fixed deposit interest is deductible for senior citizens up to ₹50,000.

It is to be noted that this threshold limit is applicable for savings bank account interest also. In your case, out of the ₹1,48,085, ₹50,000 will be deducted and the remaining portion is considered as your taxable income.

You will have to disclose the said sum in your ITR 1 and the same shall be auto-considered by the return filing tool for computation of your net taxable income.

(N. Sree Kanth is partner, GSS & Associates, Chartered Accountants, Chennai)

Q. I am 35 years old and a Kerala State government employee. I haven't taken any health insurance policy yet. I am single and live with my mother. Two months ago, I had to undergo a myomectomy and the expense came to around ₹1.25 lakh. I have no other health issues. Now, I am thinking of taking a health insurance policy, though I know it's already late. When I consulted an insurance company official, he told me that I can start claiming the policy just after the completion of one month after I apply. Is it possible?1) Can you suggest a health insurance policy that is suitable for me, that can give coverage to my uterus-related issues?2) Is it better to take a family health insurance, adding my mother also or to take two individual policies? My mother is a senior citizen.3) Which policy would be better for me in terms of waiting period and incurred claim ratio?

SREEJA SREEDHARAN

A. No, it’s not too late to take a health insurance policy. A new hospitalisation policy will admit claims after a 30-day waiting period (except if hospitalisation is due to an accident), but pre-existing conditions, like your fibroids and their removal, will be covered only after a specified waiting period, usually three to four years.

There are also waiting periods for various specified conditions and procedures even if not pre-existing. Please read the policy prospectus closely as these vary by company and policy.

Opt for a sum insured (SI) of ₹3 to ₹5 lakh. You can add your mother to the policy and get a family discount! Floater or individual SI are options, each with pros and cons.

If your mother is a tax assessee, then she can buy a separate policy to avail of income tax rebate under Section 80D. If you pay her premium, you get a higher rebate.

Incurred claims ratio is an internal business metric for insurance companies.

Perhaps you mean claims settlement ratio which indeed indicates the company’s customer service levels, a higher ratio meaning a more customer- friendly company.

Q. My husband and I are senior citizens and have been covered under our bank’s group health insurance policy for over a decade. Last year, the bank wrote to us saying they are discontinuing the policy and suggested that we should port our policies out.The insurance company we approached has refused to port my husband’s policy and we have bought a new hospitalisation policy for him.In my case, they quoted a premium for porting and encashed my cheque. Then, when the medical examination revealed a fibroid in my uterus, they rejected my porting request. At the same time, I have received a letter from them asking if I have symptoms or am undergoing any treatment and so on.What should I make of this and what do I do for coverage?

KAMALA SHETTIGAR

A. The situation certainly is contradictory! Was the porting request rejected in writing? If not, then the letter asking for clarifications may be the document to go by as they may want to know your current health status for issuing the policy.

Please do provide them factual replies to their queries and ask them in writing about your porting request status pointing out that your premium cheque has been encashed.

Also point out the fact of your earlier policy expiry date and stress that their early decision is imperative or you will lose unbroken medical coverage creating hardship for you.

They should issue the policy or refund your premium. If you are unhappy with their response, take it up with their grievance redressal official in writing.

If they reject your porting, hurry and buy a new policy in your own interest.

(The writer is a business journalist specialising in insurance & corporate history)

August turned out to be a strong month for precious metals with gold hitting a six-year high in the international market. Comex Gold futures gained close to 7% while silver rose by about 10% in August. The rally was fuelled by fragile sentiment over the global economy and growing concerns about the trade-war between the U.S. and China. Expectations of lower interest rates also played a part in fuelling the uptrend.

Comex Gold futures settled at $1,529.2 an ounce while Comex Silver futures ended August 2019 at $18.3 an ounce.

In the domestic market, the price of gold futures at MCX rose about 12% in August to close at ₹38,677 per 10-grams. MCX Silver futures, too, gained almost 12% to settle at ₹47,760 per kilogram by the end of August.

The short-term outlook for Comex gold and silver is positive. Any short-term weakness would be an opportunity to enhance exposure in precious metals. Comex gold has support at $1,490-1,500 zone. The short-term outlook would be positive if Comex gold holds above the negative trigger level of $1,480. A move above the minor resistance at $1,560 an ounce would be a sign of strength and could propel Comex gold to the short-term target of $1,585-$1,590.

The outlook for silver is no different from that of gold. The short-term support for silver is in the $17.5-$17.7 range. The short-term outlook would turn negative if the price closes below the support-cum-negative trigger level of $17.3 an ounce. Until $17.3 is breached, there would be a strong case for a rise in silver price to the immediate target zone of $19.4-19.8.

Domestically, both gold and silver prices touched record highs in August. The outlook for MCX gold and silver appears positive. The gold futures price at MCX is likely to progress to the immediate target of ₹39,700-40,000 per 10-grams. The positive view would warrant a reassessment only if the price falls below the support zone of ₹37,200-37,500 per 10-grams.

The outlook for silver at MCX is positive too and a move to the immediate target of ₹49,800-₹50,500 appears likely. MCX Silver has strong support at ₹44,500-45,000 zone. Until this zone is breached, there would be a strong case for a rise towards the target of ₹49,500.

To summarise, the short-term outlook for precious metals remains bullish. Until there is evidence to the contrary, any price weakness is likely to be an opportunity to add exposures in precious metals.

(The author is a Chennai-based analyst / trader. The views and opinions featured in this column are based on the analysis of short-term price movements in gold and silver futures at COMEX and Multi Commodity Exchange of India. This is not meant to be a trading or investment advice.)

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