EPFO Higher Pension Plan: Who Is Eligible For Higher Pension On Full Salary? How To Calculate EPS Pensions?

A new buzz is being reported, one that is eye-catching for retired employees who receive pensions under the EPS scheme. As per the latest reports, the Employees' Provident Fund Organisation (EPFO) has reportedly reinstated the old option for linking pension contributions to full salary. This decision is not a new development but a much-needed relief for many retired employees.

EPFO Higher Pension Plan Update:

According to Times of India (ToI) report, EPFO has reinstated the earlier option of linking Employees' Pension Scheme (EPS) contributions to the full basic salary. The report stated that government's recent clarification restores the earlier option of contributing towards pensions under EPS depending upon actual basic salary.

Quoting a government official, TOI stated that the move is not a new benefit but a restoration of the previous provision.

EPS Contributions:

As of now, EPS contribution is payable out of the employer's share of provident fund to employees. Hence, no contribution is payable by an employee. Employer's contributions come around 8.33% of the employee's basic salary and dearness allowance (DA) or Rs 1,250, whichever is higher. This contribution becomes a corpus for employees during his or her retirement. This rule has been applied since September 1, 2014.

Also, the central government contributes about 1.16% subject to the wage ceiling towards the pension fund.

But in 2014, the government capped the minimum pension to Rs 1,000 per month and capped the eligibility for pensions on basic pay up to Rs 15,000 per month which is derived after dearness allowance. Subsequently, the maximum pension was capped to Rs 7,500 per month. Accordingly, new employees who had basic pay above Rs 15,000 per month, could not opt for pension calculation.

What Does Reinstating Higher EPS Pension On Full Salary Mean?

Prior to the 2014 rule, employees had the option to opt for pensions on their own salary irrespective of the amount. This means that the employees agreed to contribute higher amount from their salary which in result led to higher pensions on monthly basis when they retired. That time there was no capping of basic salary and DA to be eligible for pensions per month. This resulted in many employees to receive pensions which were half of their previously drawn salaries on a monthly basis.

Before the 2014 rule, the EPS wage ceiling was Rs 6,500 per month. But after 2014 rule, the higher contribution option to EPS was discontinued.

However, under the new rule, reportedly employers now have the willingness to contribute a higher amount to employees' EPS. Nevertheless, without the employer's approval, employees will not be able to choose the higher pension contribution option. Also, the new rule applies to only those employees who have already exercised a higher pension option before 2014; hence, only a certain number of employees will benefit. The restoration of the higher pension option does not apply to all employees.

How Is Employees Pension Calculated?

EPF Pension Formula

Monthly Pension = (Pensionable Salary × Pensionable Service) ÷ 70

It needs to be noted that "Average Salary" here refers to the average of the Basic Salary + DA combined that was drawn in the last 60 months. Meanwhile, Pensionable Service refers to the number of years an employee worked in the organized sector after 15th November 1995. Further, the number 70 is taken as a standard factor in the formula as a proxy for life expectancy.

As per EPFO guidelines, an employee shall cease to be the member of Pension Fund from the date of attaining 58 years of age or from the date of vesting admissible benefits under the Scheme, whichever is earlier.

EPS Pension Calculation:

Pensionable Salary = Rs 15,000
Pensionable Service = 25 years
Calculation: 15,000 × 25 ÷ 70 = 5,357 per month

This gives a simple estimate of your expected EPS pension. The example is taken from Shriram Life website.

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