Deadline for higher pension ends tomorrow: Should you opt for it?

The government backed EPF higher pension scheme allows EPF members to have the option to contribute an additional amount to their pension fund

The deadline to apply for higher pension under the Employees’ Pension Scheme (EPS) ends tomorrow ( July 11), unless the EPFO extends it further. A member of the Employees’ Provident Fund Organisation (EPFO) is eligible to receive pension if he/she is part of the Employees’ Pension Scheme (EPS). The pension under EPS starts from the age of 58 years for an individual.

Prior to 2014, employees had the option to choose a higher EPS, but an amendment brought in in 2014 caps the EPS contribution at 8.33 per cent. This means that an employee cannot contribute more than Rs 15,000 every month for his pension plan even if he or she draws a higher salary. But earlier this year EPFO issued guidelines to allow a section of its older members to opt for a higher pension under the EPS. The EPFO’s guidelines were issued in compliance with the Supreme Court's November 4, 2022, order.

 

Eligible members now have the eption to let employers deduct a sum equal to 8.33 percent of the actual basic salary towards the EPS pension.

This means that employee and employer can sign up together, requesting the EPFO to deduct 8.33 percent of the higher monthly basic salary, thus ensuring a larger accumulation towards pension over their work life.

 The deadline to do so was first extended from March 3, 2023, to May 3, 2023. The second extension moved the deadline to June 26, 2023 and then to the current July 11, 2023.

What is the difference between Provident Fund Scheme and Pension scheme 

Under the Provident Fund Scheme, members are eligible for lumpsum withdrawal of the entire corpus on retirement (along with interest credited at the notified rates). Whereas, under the Pension Scheme, members are eligible for monthly pension post-retirement as per the formula prescribed in the Pension Scheme, if the member has rendered service of 10 years or more.

"If a member opts for higher pension, a portion of the corpus under the Provident Fund Scheme would be diverted towards the Pension Scheme. Consequently, the member would receive a higher monthly pension post-retirement but lower lumpsum withdrawal from Provident Fund Scheme on retirement," said Puneet Gupta, Partner, People Advisory Services, EY India.

Amount to be diverted from Provident Fund Scheme to Pension Scheme:

If a member opts for higher pension, the following amount will be reallocated from the Provident Fund Scheme to the Pension Scheme, from the employer’s share of contributions:

a. 8.33% of the Basic Salary exceeding the statutory ceiling from the date the employee started contributing towards the Provident Fund Scheme on a Basic Salary exceeding the statutory ceiling till the date of exit
 

b. Additional contribution of 1.16% of Basic Salary exceeding the statutory ceiling with effect from 1 September 2014 till the date of exit
 

c. Interest credited on (i) and (ii) above as per the notified rates
 

II. Calculation of higher pension

Members who have rendered service of 10 or more years are entitled to monthly pension on attaining the age of 58 years. The formula for calculation of monthly pension is (Pensionable Salary X Pensionable Service) / 70. If a member opts for higher pension, the Pensionable Salary will be determined based on the average basic salary for last five years from the date of exit, whereas, if a member does not opt for higher pension, the pensionable salary will be capped to the statutory ceiling (i.e., currently  Rs 15,000).

How to calculate high pension on actual salary

The formula for calculating higher pension is different for those retiring before September 1, 2014, and for those retiring after this date.

For those who retired before September 1, 2014, the pension will be calculated on the basis of average monthly pay drawn 12 months prior to retirement (or exit from the pension fund). For those who retired post this date, the pension will be calculated on the basis of average monthly pay during the 60 months immediately preceding the retirement.

At present, pension is calculated as being equal to pensionable salary (average of last 60 months’ salary) x number of years of contribution/70, according to EPF.

The EPFO also released an Excel utility-based calculator to estimate dues that one must pay from their EPF balance or their own savings if necessary.

Who can apply? 

Two sets of employees and retirees are eligible to apply for higher pension on actual salary instead of the statutory salary limit of Rs 15,000 (or older limits of Rs 6,500 and Rs 5,000, if applicable) in place since September 1, 2014.

If you retired before September 1, 2014 and had exercised the joint option with your employer to claim higher pension then, you will have to apply for validation of the application. If you retired before this date but had not selected the higher pension option, you will not be eligible to apply now.

If you were in service prior to September 1, 2014, continue to be in service, you can make a joint application for a higher pension.

Should you opt for higher EPF?

 Pratik Vaidya, MD & CVO, Karma Global, a staffing & compliance organisation, said that the amount of higher pension that you will receive depends on the following factors:

1. The number of years you have contributed to the EPS.
2. Your average salary of your last 5 years (60 months) of employment 
3. The percentage of your salary that you contribute to the EPS.

For example, if you have contributed to the EPS for 30 years, your average salary is Rs 20,000 per month, and you contribute 8.33% of your salary to the EPS, you will receive a higher pension of Rs 3,333 per month.

Besides the above, EPFO has also provided pension calculator and you need to firstly enter the wage amount from EPF enrolment or November 1995 whichever is latter, secondly disclose wage information until retirement or February 2023 whichever comes earlier, and the calculator will then show the monthly EPS amount payable.

According to the EPFO website disclaimer, “The dues calculated through the calculator is a ball park estimate."

 Actual dues calculated on the basis of records by the concerned Regional Office of EPFO will be authentic and that will be final which will be known only later which may throw up a  surprise.

Additionally, the excel-based tool will determine the entire interest accrued on this unpaid contribution until March 31, 2023, using the historical EPF interest application for the relevant months and will also add up the additional 1.16% contribution to the EPS account .  If the employee's EPF account has a sufficient balance, both of these sums will be collected and paid to the EPS account.

"The Employee Pension Scheme (EPS) offers social security benefits by ensuring a steady income after retirement, which can be particularly valuable for individuals without significant alternative sources of income during their post-retirement years. However, it's important to note that the EPF payments received by employees after retirement are exempt from tax, while the monthly pension is taxable. This taxation aspect adds complexity to the decision-making process," said Vaidya.

While choosing the higher pension contribution can increase the monthly pension amount, it also leads to a reduction in the lump sum provided by the EPF upon retirement

Taxpayers seeking a higher monthly pension income and not requiring a large retirement corpus may opt for the Employee Pension Scheme (EPS), which offers a monthly payout throughout their retirement years.

Employees should remember that by opting for higher pension,  lump sum withdrawal under Provident Fund will go down and monthly pension under the Pension Scheme will increase. However, under the Pension Scheme, only a monthly pension is available to the employee, his / her spouse and children less than 25 years of age and there is no return of corpus.

"If you prioritize having a higher monthly pension income during your retirement years, even though it is fully taxable, and you don't require a large retirement corpus, then opting for EPS may be beneficial. However, if you prefer to have a larger lump sum withdrawal from the EPF (Employee Provident Fund) which is tax-free, or if you have other sources of retirement income, then the higher pension option may not be as advantageous," said Nikhil Varma, Managing Partner, MVAC Advocates & Consultants.

"A critical aspect to evaluate is – whether you need a higher lumpsum corpus available at your disposal immediately on retirement but with lower monthly pension post-retirement OR whether you need a higher monthly pension post-retirement but with a lower lumpsum corpus available immediately after retirement. The decision to opt for higher pension is dependent on multiple variables, such as - life expectancy, age, expected rate of return on personal investments, expected monthly income from other sources post retirement, requirement of lumpsum funds to meet any personal obligations, tax implications, etc. As most of these factors are very individual-specific, the decision to opt for higher pension is to a large extent based on the personal choice / preference of the individual," said Puneet Gupta, Partner, People Advisory Services, EY India.

It is recommended to consider your financial goals, tax implications, and personal preferences before making a decision.

EY explains with a sample illustration on higher pension benefit

- Mr. A became a member of Provident Fund for the first time in 1 January 1996 and retired on 31 December 2022 on attaining 58 years of age.  He was paid Basic Salary of Rs 16,000 per month at the time of joining and received annual

increment of 8% each year, throughout his service period. The PF contributions were being made on the full Basic Salary for the entire period of employment.  After retirement on 31 December 2022, Mr A had withdrawn the entire Provident Fund corpus. Mr. A is currently eligible for a monthly pension of Rs 6,214 on Pensionable Salary restricted to the statutory wage ceiling (i.e., Rs 15,000 currently).

Considering the above facts, if Mr. A wishes to avail the benefit of higher pension, he will have to deposit an amount of Rs 31,72,442 to the EPFO under the Pension Scheme in order to be eligible for a monthly pension of Rs 42,282 as against Rs 6,214 (i.e., an increase in pension by INR 36,068).

Refer to the table below for detailed breakup of the amount to be diverted towards Pension Scheme on opting for higher pension and the calculation of monthly pension under both the scenarios

a. Breakup of dues payable by Mr. A towards the Pension Scheme:

*The above amounts are calculated as per the calculator issued by the EPFO on the website

b. Calculation of monthly pension under the two scenarios:

*If widow pension is not paid, children pension shall be 75% of monthly widow pension (instead of 25%).

Under the Pension Scheme, there is no return of corpus after death of member / spouse and after the children have attained the age of 25 years.

Complication and challenges

There are several practical challenges that employees and retirees are facing while submitting their applications for higher pension.

For instance many don't have access to old salary slips and employment data which is needed for computing  how much money will get transferred from their EPF to their EPS account.

Employees have to submit a joint application form along with their employer, supported by documents like authenticated salary slips, in order to avail of higher pension based on actual salary.