Employees Pension Scheme 1995

We work hard throughout our lives, so that we can have a good retired life. How do we achieve this? By planning for our retirement. Do we actually plan? No…

Knowing our culture, it is very difficult for us to save. Any occasion we have in our family, we call all and sundry and spend a bomb. We keep earning and spending for others always forgetting to save for our own selves. Knowing this our government did the thinking for us and started the Employees Pension Scheme.

All of us who are working and Provident fund is deducted, automatically also become a part of the Employees Pension Scheme. Now you are smiling, wow I would get pension, but do you know how much?

Before we get into the calculations, let me give you some good news.

Minimum monthly pension of Rs 1,000 will be implemented from September 1, 2014.  There is another part i.e. wage ceiling is increased to Rs.15,000/-, we will not get into this.

Now that we know what the minimum is, let us understand how this scheme came into force. We just keep paying, because it is mandatory. The Pension Scheme was started along with the provident fund scheme, but on 16th November 1995, the government changed the rules of calculations of the scheme with new rules called the Employees Pension Scheme 1995.

So for pension calculations the number of years of service is divided into 2 parts i.e. service before 16th November 1995 and service from 16th November 1995. The first part is called past service as it was with old rules and latter part as pensionable service. Already confused? This is the way, anything from the government is anyway done. Now past service is divided into 4 slabs, the reason given is to make it simple. Service upto 11 years, 12 to 15 years, 16 to 19 years and 20 & above.

If the salary as on 16.11.95 is below Rs. 2500, the monthly compensation will be Rs. 80, 95, 120 & 150 respectively. For Rs. 2500 & above this will be Rs. 85, 105, 135 & 170. In the case of those attain 58 years after 16.11.95, the above compensation will be multiplied by a factor stipulated in table B, according to the difference between 16.11.95 and the date of completion of 58 years.

For simplicity purposes I have only put factors which are relevant today.

TABLE – B

If Years to 58 of age from 15.11.1995 is:	then factor is:
less than 20 year	6.414
less than 21 year	7.056
less than 22 year	7.761
less than 23 year	8.537
less than 24 year	9.390

For greater than this use 1.08 raised to number of years

Now the best part Pension calculation, the formula is as follows

Pensionable salary*pensionable service/70

Pensionable salary is the amount on which the pension is given to an employee. The pensionable salary is divided into the following three ways:

(1) Salary that is below Rs. 6500
(2) Salary that is Rs. 6500 and above but contribution of statutory calling is Rs. 6500
(3) Salary that is above Rs.6500 and opted to contribute on actual salary.

In point 2 the pensionable service is Rs. 6500 but in point 1 and 3 the pensionable service will be the average of last 12 months .

If an employees has completed his 20 years and above of his service he will be given 2 years bonus.

Let’s take an example:

Date of Birth - 23.1.1967
Date of join - 23.10.1987
Salary on 16.11.95 – Less than Rs.2500/-
Salary on completion of 58 years on 22.1.2025 - Rs. 6500 (Statutory Ceiling)

Past Service - 8 yr 1 m (approx) rounded to 8 years
Compensation - Rs. 80
Factor as per Table B (for 30 years, i.e the difference between 16.11.95 & 22.1.2025) – 10.0627
Past Service Benefit - 80 x 10.0627 = Rs. 805 - (A)

Pensionable Service - 30 years
Bonus (Service is 20 & above) - 2
Pensionable Salary - Rs. 6500
Pensionable Benefit - 6500 x 32 / 70 = 2971 - (B)

Total Pension - (A) + (B) = Rs. 3776

Arbitrage Funds

We have heard of different types of mutual funds and during that conversation sometimes you hear arbitrage funds or you might not have heard of it at all. What are Arbitrage Funds? To understand Arbitrage funds let us go to the definition of Arbitrage. Arbitrage means buying a product in one market and selling it in another to make a profit due to the difference on price.

So now that we know what arbitrage means how does it apply to the stock market? In the stock market trades are done in cash or future and the price in both these are different. In such a case, if the price in the future market is higher than the cash price, one can purchase the stock in cash today and deliver it in the future market at a higher price and make a profit.

That means if we invest in these funds you will never lose your capital. Then why have arbitrage funds not caught up. One reason is, the profit will take place only on a future date and if you want to exit in between there could be a chance of loss. This chance of loss is what is holding people back. But if you are ready to wait for some time, the returns are good, even better that debt funds.

Arbitrage funds are good in a rising market, as the future prices will most of the time be higher. So keep a watch on the cash and future prices of around 10 stocks and if you see the average difference reducing, it’s time to move out of the arbitrage fund.

The other advantage in arbitrage funds is taxation. Since they are mostly equity funds and for equity funds there is no long term capital gain. Even in case of short term capital gain, the tax is just 15% of the capital gain. This is better than debt funds where short term capital gain is taxable as per your tax slab.

So if you are looking at short term, arbitrage funds are better than debt funds, but for long term, equity funds are the best.