India
India: Pension system in 2016
Workers are covered under the earnings-related employee pension scheme and defined contribution employee provident fund administered by the Employees Provident Fund Organization (EPFO) and other employer managed funds.
Qualifying conditions
The normal pension age for earnings-related pension benefits from the Employees’ Pension Scheme is 58 years with a minimum of 10 years of contributions. The pension age for the earnings-related Employees Provident Fund scheme is 55 years.
About 12% of the workforce (or approximately 58 million people) are covered under various pension systems according to the 2011 census. Covered individuals belong to the organized sectors and are employed by the government, government enterprises, public and private sector enterprises.
The remaining 88% of the workforce are mainly occupied in the unorganized sector (self-employed, daily wage workers, farmers etc.) and some are in the organized sector but are not mandatorily covered by the EPFO. For this share of the workforce, the Public Provident Fund (PPF) and Postal Saving Schemes have traditionally been the main long-term savings instruments but these have only catered to a relatively small section of this population.
Benefit calculation
Employees Provident Fund Schemes (EPF)
For employees with basic wages less than or equal to INR 15 000 per month, the employee contributes 12% of the monthly salary and the employer contributes 3.67%. This combined 15.67% accumulates as a lump-sum.
For employees with basic wages above INR 15 000 per month, the employee may choose to contribute based on wage of INR 15 000 per month or contribute on the higher wage amount. The employer shall contribute based on wage of INR 15 000 per month. For an International Worker, wage ceiling of 15000/- is not applicable.
For employers with less than 10 employees, the contribution rate for the employees is 10% and the employer contributes 1.67%.
There is no annuity and full accumulations are paid on retirement after attaining 55 years of age. For comparison with other economies, for replacement rate purposes the pension is shown as a price-indexed annuity based on sex-specific mortality rates.
Employees’ Pension Scheme (EPS)
Starting from September 2014 new members with basic wage above INR 15 000 per month no longer have the option of contributing to the EPS. Existing participants who have until now been contributing over the earlier INR 6 500 wage cap have an option to continue contributing over the increased wage cap of INR 15 000 but they would also have to contribute the government subsidy of 1.16% on the excess amount.
For the existing and new subscribers who are within the new basic wage cap of INR 15 000, the employer contributes an amount equal to 8.33% of the basic wage to the EPS fund and the Central Government contributes a subsidy of 1.16% of the salary into the EPS. This accumulation is used to pay various pension benefits on retirement or early termination. The kind of pension a member gets under the scheme depends upon the age at which they retire and the number of years of eligible service.
Monthly pension = (pensionable salary x pensionable service)/70
The pensionable salary will be calculated on the average monthly pay for the contribution period of the last 60 months (as against 12 months earlier) preceding the date of exit from the membership. The maximum possible replacement rate is roughly 50%.
With effect from September 2014, a minimum pension level of INR 1 000 per month has been provided under the scheme. With effect from June 2016, a subscriber is permitted to defer drawing pension by up-to two years. Every year of deferment results in an increase in the pension amount by 4%. For example, if pension is drawn from age 59 years, the pension amount would be 104% of the normal pension amount and if the pension is drawn from age 60 years, the pension amount be 108.16% of the normal pension. The subscriber may also choose to continue to contribute till the age the pension withdrawal is deferred to. In this case, the enhanced pension amount shall be determined by the pension division based on a formula.
Variant careers
Early retirement
The EPS can be claimed from age 50 with 10 years of contribution and the benefits are reduced by 4% per year of early retirement, before age 58. If a member leaves his job before rendering at least 10 years of service, he is entitled to a lump-sum withdrawal benefit. The amount he can withdraw is a proportion of his monthly salary at the date of exit from employment. This proportion depends on the number of years of eligible services he has rendered. No pension is payable in cases where there is a break in service before 10 years.
In case of EPF, there are multiple scenarios, which allow for early access to the accumulation. Partial withdrawals relate to marriage, housing advance, financing life insurance policy, illness of members/family members, withdrawals are also permitted one year before retirement etc. In addition to various permitted partial withdrawals, employees can close their account and withdraw the full corpus in case they move from one employer to another or decide to retire early. No gratuity can be claimed before five years of service.
Late retirement
It is possible to delay claiming pension after normal pension age by deferring the pension by a maximum of two years as discussed in the section on EPS.
Personal income tax and social security contributions
Taxation of workers
Contributions to the provident fund and pension scheme of EPFO are allowed as deductions from income while computing one's tax liability. A total deduction up to INR 150 000 is applied to social security contributions. This limit also includes other contributions like life insurance premium and Public Provident Fund (Voluntary Scheme) among others.
Health insurance premium up to INR 15 000 is deductible (not included in the model). Transport allowance of INR 800 per month is exempted from taxation (included in the model).
Additional deduction (not included in the model): Mediclaim premium paid for parents. Maximum deduction INR 15 000. In case any of the parents covered by the Mediclaim policy is a senior citizen, deduction amount is enhanced to INR 20 000.
Taxation of worker’s income
India’s financial year begins in April.
The Income Tax rates are provided below. The basic Income Tax exemption limit is different for assesses under 60 years, 60-79 years and above 80 years. Higher education and secondary cess of 3% of Income Tax is applicable over and above the amount computed as Income Tax. For assesses, whose total income exceeds INR 10 million, an additional surcharge of 15% is applicable.
The following rates apply for 2016-17:
Taxation of pensioners
Health insurance premium of up to INR 20 000 is deductible for senior citizens over 65 years.
Taxation of pension income
Maturity benefits on account of provident fund and pension from EPFO are fully tax exempt. Lump-sum benefits and Periodic Annuity in case of NPS are taxable when the same is received. EPFO enjoys an EEE (exempt, exempt, exempt) regime where it is tax free during contribution, growth and withdrawal phase. NPS, on the other hand is under an EET (Exempt, Exempt, Taxed) regime where maturity benefits are taxed. As NPS is still in infancy, the rule for taxation on withdrawal does not really have any impact as the withdrawal stage is still some years away even for the first set of subscribers.
The following income tax rules apply to senior citizens over age 60.
Social security contributions payable by pensioners
Pensioners do not pay any social security contributions.
Assumptions: Real rate of return 3%, real earnings growth 1.25%, inflation 2%, and real discount rate 2%. All systems are modelled and indexed according to what is legislated. Transitional rules apply where relevant. DC conversion rate equal 90%. Labour market entry occurs at age 20 in 2016. Tax system latest available: 2016.