The EPFO has released a circular in June 2023, which finally announces the new formula for computing pension on higher salary, instead of the existing statutory limits. That is, now we know what will EPFO use as pension calculation method to find our higher pension amount in 2023.
The higher pension will be applicable to those who opt for a higher pension on their actual salary instead of the current statutory limit of Rs 15,000 per month under the Employees Pension Scheme (EPS), 1995 or EPS95 scheme.
So what is the exact pension calculation formula released by the Employees’ Provident Fund Organisation?
As per the circular, the formula for the calculation of higher pension will be different for those retiring before 1st September 2014 and those retiring after the said date.
- Pension Calculation Formula (If Retired BEFORE 1st September 2014) – If an employee retired before 1st Sept 2014, i.e. his/her EPS pension started prior to the given date, then the higher pension formula and calculation will be based on the average monthly salary during the last 12 months preceding the date of retirement (or exit from the membership of the EPS pension fund).
- Pension Calculation Formula (If Retired AFTER 1st September 2014) – If an employee retired after 1st Sept 2014 or will retire in future, then the higher pension formula and calculation will instead be based on the average monthly salary during the last 60 months preceding the date of retirement (or exit from the membership of the EPS pension fund).
So that is the new formula for computing higher EPS pension in actual salary for those opting for higher pension from EPS.
Let’s take two example to better understand this:
- Suppose you started working at age 22 and during your first job, joined the EPS scheme in 2008 (coincidently this was the year of my first job as well) and your retirement is scheduled at age 60 in the year 2046. So the average salary for higher pension calculation will be based on your average pay in the last 5 years (or 60 months) of working, i.e. year 2042, 2043, 2044, 2045 and 2046.
- On the other hand say you retired in 2013, which is earlier than the deadline of 1st September 2014, then in this case the average salary for higher pension calculation will be based on your average pay in the last 1 year (or 12 months) of working, i.e. year 2012-2013 – which was the last year of working for you.
Here is the circular (in image below) –
Currently, the formula for calculating pension under the EPS scheme is as follows = (Average Salary of last 60 months X Service Period) divided by 70.
At present, the EPS pension calculation is based on the statutory wage ceiling of Rs 15,000 only and not the actual salary. Out of the employer’s contribution, Rs 1250 (8.33% of Rs 15,000) goes towards EPS (which is used to fund the pension pool that pays pension income eventually)
But if one opts for higher pension now, then they can instead choose to redirect 8.33% of your actual salary (and not statuary limit of Rs 15,000) towards the pension pool which will eventually be used to provide higher pension after retirement.
Also, the government via a notification dated 4 May 2023, has enhanced the employer’s contribution to the EPS account from earlier 8.33% to now 9.49% on EPS contributions above Rs 15,000 per month (the current wage ceiling) for those employees who are eligible to opt for a higher pension from EPS. It has also been clarified by the ministry that the extra 1.16% (difference in 9.49% and 8.33%) would be coming from the employer’s side and from within the overall 12% of the contribution of the employers into the provident fund. So those opting for a higher pension will no longer have to contribute the additional 1.16% from their salary that is above the wage ceiling of Rs 15,000. So if an employee opts for the higher pension, there will be no additional burden for paying this extra 1.16% from own contributions.
You can read more about higher pension dilemma that many are facing in a detailed article I wrote – Should you Choose EPFO’s higher EPS Pension & contribute from EPF?
So that was about the latest EPFO Formula for calculating Higher Pension for employees if they choose to exercise this option by contributing a one-time Lumpsum transfer from their EPF accounts in 2023.