Last Updated on May 27, 2023 at 8:45 am
Further extension of the deadline to opt for a higher pension under the Employee Pension Scheme (EPS) has been extended to June 26, 2023. So, the subscriber of EPFO has a month to decide whether to opt for a higher pension scheme from EPS. The objective of this article is to help you determine the same.
About the author: Salma Sony is a SEBI Registered Investment Adviser and a Certified Financial Planner with 13 years of experience in the financial industry. She is an M.B.A. Finance graduate and has guided 300+ families in comprehensive financial planning with a vision to advise families to achieve financial wellness and peace of mind. She can be contacted via her website: salmasony.com.
What is Employee Pension Scheme (EPS)? All salaried individuals contributing to EPF (Employee Provident Fund) are also a subscriber of EPS, where employees contribute 12% of their basic salary + D.A. (dearness allowance) towards the EPF. Of the employer’s 12% contribution, 8.33% goes to the Employees’ Pension Scheme (EPS) subject to the max contribution of Rs. 15,000 per annum, i.e., Rs. 1,250 p.m., and 3.67% to the EPF.
An employee can withdraw EPF entirely at retirement (agr-58) tax-free; however, EPS is paid as a monthly taxable pension. So, far expected pension from EPS was lower due to EPS contribution being capped at 15,000 p.a.; that’s why opting for a higher pension scheme may look attractive. Let’s explore.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
How to opt for a higher pension in EPFO?
Employees who are members of the EPS-95 and are in service/retired after 2014 can opt for a higher pension by filing a joint option application with the regional PF commissioner before June 26, 2023.
Step 1: Employees should visit the EPFO portal
Step 2: Click on the “Pension on Higher Salary” – An online application to validate Joint Option.
Step 3: Fill in the details and submit the form.
The EPFO will digitally register the application and provide the receipt number to the applicant. Post that, EPFO will send it to the respective employer to verify for further processing.
Who is eligible to receive a higher pension in EPFO?
The following employees are eligible for a higher pension in EPFO:
(a)Employees retired before 01-Sep-2014
- Who opted for a higher pension under para 11 (3) of the EPS-95.
- For whom the EPFO rejected the option exercised under para 11(3) of the EPS-95.
- Whose EPS contribution was above the maximum limit of Rs.5,000 or Rs.6,500.
(b) Employees retired/working after 01/09/2014 –
- Who were members of the EPS-95 and did not opt for a higher pension.
- Whose pension contribution was above the maximum limit of Rs. 5,000 or Rs. 6,500.
How to calculate EPF higher pension?
The formula for calculating EPF higher pension is as follows:
Monthly pension amount = (Pensionable salary X pensionable service)/70.
How much can you expect pension existing via a higher pension scheme?
Case-1: Assume “X” is 26 and started working in 2022 with basic pay of Rs. 43,000. “X” wants to retire at age 58 (year 2055), which means the total expected service year will be 33 (Age 58 – 26).
a) With the existing EPS plan capped at an annual contribution of Rs. 15,000
Monthly pension amount = (Pensionable salary X pensionable service)/70.
Expected monthly pension = (Rs. 15,000 x 33)/70 = Rs. 7,071
b) With a higher EPS plan, what will be the pension?
Assumption: Base salary of Rs 43,000 increased at 5% p.a.
Average base salary in the last five years = Rs 1,95,601
Expected monthly pension = 1,95,601X 33/70 = Rs. 92,212
Difference: Rs. 85,141
The difference in pension is enormous.
Case-2: Assume “Y” is 36 and started working in 2012 with basic pay of Rs. 43,000. “Y” wants to retire at age 58 (year 2055), which means the total expected service year will be 33 (Age 58 – 26).
As “Y” have already served ten years, there will be a shift of corpus from EPF to EPS.
EPFO, in the circular dated May 11, 2023, came out with the calculation methodology to figure out the amount that shall be shifted from EPF to EPS if you choose to apply for a higher pension.
Remember, the higher pension comes at the cost of a reduced EPF corpus, payable tax-free to an employee upon retirement.
Per the last revealed valuation deficit in the pension fund for the year ended March 31, 2017, was Rs 15,000 crore, which is a worrying factor for me. It’s not only about getting a higher pension but also if one decides to shift a more significant chunk to EPS by option higher pension option.
Points to consider before you opt for a higher pension under EPS
1) Reduced pension to spouse & child: Subscribers are eligible for a full pension after the commencement of the monthly pension until they are alive. By all means, all the EPS subscribers should live longer and continue to get a full pension. However, after the subscriber’s death, the spouse receives only 50% of the retirement; after the spouse’s death, a maximum of 2 children get 25% each until they are 25.
2) The pension depends on the last 60 months (5 years) of the base salary:
- Your pension will be lower if you plan to take a lighter job with lesser pay close to retirement.
- If you plan to retire early, your pension will be lower due to fewer service years, and you can only access a pension once you turn 50.
3) No pension for early retirees: The retirement pension is available only if the employee completes ten years in the scheme. Those who don’t can withdraw their EPS contributions.
Is the higher pension scheme beneficial?
It can benefit individuals close to their retirement (5 years or less) and who have accumulated large sums in other investments toward retirement corpus. The higher pension contribution will increase the monthly pension amount but reduce the EPF lump sum payable to an employee upon retirement. Also, note that the monthly pension is taxable, but the lumpsum EPF amount payable on retirement is tax-exempt.
Young subscribers- You have plenty of options to create your pension stream.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)