Whether choosing the option for higher pension amount under the EPS 95 scheme is good or not for you is what we will try to analyse in this blog using some calculations. Also, you will find a calculator which may be able to suggest you how long your un-transferred portfolio may last, in case you do not opt to switch your EPF contribution to EPS?
No Right and Wrong Answer – Only Feel Good Answer
Amit Chopra
Recently EPFO has opened the option for switching to the higher pension for certain section of employees. As a preparation, some other organisations have also started asking its employees on whether they would like to switch to higher pension option. In case you meet the eligibility criteria for higher pension under EPS-95 scheme, read on.
Let’s start by understanding our PF statement. For the purpose of this blog (and associated video) we will take Salary = Basic + DA
The contribution to your EPF amount consists of 3 parts –
- Employee contribution – 12% of Salary
- Employer contribution – 12% of Salary (divided into 2 parts)
- 8.33% of this goes to Employee Pension Scheme (EPS) against which you will be getting pension
- Rest 3.67% goes to Provident Fund.
(Update 3rd May) There is also now an inclusion of 1.16% which needs to be catered to and now the new values are
- Employee contribution – 12% of Salary – This goes to Employer Provident Fund.
- Employer contribution – 12% of Salary (divided into 3 parts)
- 8.33% of this goes to Employee Pension Scheme (EPS) against which you will be getting pension
- 1.16% of this will now also go to Employee Pension Scheme (EPS) as admin charges
- Rest 2.51% goes to Employer Provident Fund.
(This post is yet to be updated to account for the updated 1.16% calculation however its updated in the Excel Sheet link at bottom and explained in detail via this video)
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Part-1 History of EPS 95 Scheme
1995 to Sep – 2014
Salary = 25,000
EPS Wage = 6,500
Employee Share in EPF = 3,000 (12% of 25,000)
Employer Share in EPS = 541 (8.33% of 6,500)
Employer Share in EPF = (3.67% of 6,500) + (12% of [25,000-6,500]) = 239 + 2,220 = 2,459
Simplistically,
Employer Share in EPF = 3,000 – (8.33% of 6,500) = 3,000 – 541 = 2,459
After Sep-2014
Salary = 50,000
EPS Wage = 15,000
Employee Share in EPF = 6,000 (12% of 50,000)
Employer Share in EPS = 1250 (8.33% of 15,000)
Employer Share in EPF = 6,000 – (8.33% of 15,000) = 6,000 – 1,250 = 4,750
After FY 2021-22
Salary = 1,00,000
EPS Wage = 15,000
Employee Share in EPF = 12,000 (12% of 1,00,000)
Employer Share in EPS = 1250 (8.33% of 15,000)
Employer Share in EPF = 12,000 – (8.33% of 15,000) = 12,000 – 1,250 = 10,750
Part-2 Comparison with Higher Pension Scheme option
Before Sep-2014 (Comparison)
Salary = 25,000
EPS Wage = 25,000
Employee Share in EPF = 3,000 (12% of 25,000)
Employer Share in EPS = 2,082 (8.33% of 25,000)
Employer Share in EPF = 918 (3.67% of 25,000)
EXCESS Contribution in EPS = 2,082 – 541 = 1,541
LESS Contribution in EPF = 2,459 – 918 = 1,541
After Sep-2014 (Comparison)
Salary = 50,000
EPS Wage = 50,000
Employee Share in EPF = 6,000 (12% of 50,000)
Employer Share in EPS = 4,250 (8.33% of 50,000)
Employer Share in EPF = 1,250 ((3.67% of 50,000)
EXCESS Contribution in EPS = 4,250 – 1,250 = 3,000
LESS Contribution in EPF = 4,750 – 1,750 = 3,000
After FY 2021-22 (Comparison)
Salary = 1,00,000
EPS Wage = 1,00,000
Employee Share in EPF = 12,000 (12% of 1,00,000)
Employer Share in EPS = 8,330 (8.33% of 1,00,000)
Employer Share in EPF = 3,670 ((3.67% of 1,00,000)
EXCESS Contribution in EPS = 8,330 – 1,250 = 7,080
LESS Contribution in EPF = 10,750 – 3,670 = 7,080
Important Observation – Tax is only applicable on Employee share and NOT on Employer Share as told by some YouTubers. How the PF account will be split in 2 parts has been explained here.
Part 3 – Reality of 8.33%
If you are wondering why this weird percentage of 8.33% has been taken to calculate EPS contribution, then lets have a look at this example.
Assume you Monthly Basic + DA is 1,00,000.
8.33% of 1,00,000 is 8,330
So, in an year, you would have contributed – 8,330 x 12 = 99,960 i.e. approximately 1,00,000
Thus, what you are contributing really is 1/12th of your Salary on a monthly basis and if you convert 1/12 in percentage terms, it comes to be 8.33333333….% which has been rounded off to 8.33%
And this, in 1 year, assuming your salary remains constant, you contribute portion equivalent of 1 month of salary to your EPS account.
Part 4 – How is Pension Calculated?
Below is an extract from the EPS Scheme document which clearly prescribes the formula for calculating of Monthly Pension.
Let’s under this better with the help of an example –
Between 1995- Sep 2014
If Pensionable Salary is 6,500 and number of working years is 35, then
Pensionable Salary = 6500*35/70 = 3250
After Sep 2014
If Pensionable Salary is 15,000 and number of working years is 35, then
Pensionable Salary = 15000*35/70 = 7500
For Higher Pension Cases
If Pensionable Salary is 1,00,000 and number of working years is 35, then
Pensionable Salary = 100000*35/70 = 50000
As you can see that in 3rd option, one can get much higher pension (literally no ceiling) and that is why people went to court for it. What was the decision of court, I have covered it in a dedicated video.
Meanwhile, do check on which Tax Regime is better for you using this Free online calculator.
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Product on sale₹1,999.00 -
Product on sale₹1,499.00 -
Product on sale₹1,499.00
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Part 5 – Getting Higher Pension
We have seen that going by the rules, if we want the Pension on actual salary amount, then our 8.33% contribution to EPS should also have been on the actual salary amount.
But since we have been contributing on the reduced (ceiling) pension of either 6,500 or 15,000, hence our contribution of EPS has been much lesser than what it should have been.
Let’s revisit this using the examples we have taken previously.
OPTION 1
Salary = 1,00,000
EPS Wage = 15,000
Employee Share in EPF = 12,000 (12% of 1,00,000)
Employer Share in EPS = 1250 (8.33% of 15,000)
Employer Share in EPF = 12,000 – (8.33% of 15,000) = 12,000 – 1,250 = 10,750
Pensionable Salary = 15000*35/70 = 7500
OPTION 2
Salary = 1,00,000
EPS Wage = 1,00,000
Employee Share in EPF = 12,000 (12% of 1,00,000)
Employer Share in EPS = 8,330 (8.33% of 1,00,000)
Employer Share in EPF = 3,670 ((3.67% of 1,00,000)
Pensionable Salary = 100000*35/70 = 50000
To get this excess salary of 42,500 (50,000 – 7,500), you need to make
EXCESS Contribution in EPS = 8,330 – 1,250 = 7,080 per month
and you will get
LESS Contribution in EPF = 10,750 – 3,670 = 7,080 per month
Simplistically, for above case, by paying 7,080 per month today you will get extra pension of 42,500 per month at retirement. BUT, it is NOT that simple else why would you be asking this question!!!
Part 6 – Problem for people
First, for people who have already retired (in 2014 or after), they will have to deposit the excess amount (including interest) with PF which will be contributed to EPS portion and for many people it will be a challenge to deposit the amount. They would have either invested that amount somewhere or may find it difficult to part with such a big sum of money.
Second, the pensionable salary is being calculated as an average of last 60 months salary (as opposed to previous case of average of 12 month salary). This may bring a lot of variation for people who had significant increase in their salaries towards the last couple of years before retirement.
Lastly, for people who joined EPF before 2014 but have not yet retired, they will have to perform cost-benefit calculation to see whether its worth parting with their previous EPF contribution. Though, as compared to the already retired people, they won’t have to take the pain of depositing the sum of money which they have previously withdrawn (except for cases who have taken loan or advances)
For people who have retired before 2014, this option is NOT available.
Part 7 – Should you Opt for higher Pension
Let’s visually revisit the example we saw in Part 5
Let’s simplify this and see again.
Now, things have become interesting. So, over the 35 years period, the total difference of Principal + Interest comes to be 1,58,11,138. And so, you need to forego this amount to be able to get extra 42,500 as pension. What do you think of this now?
So, question now becomes –
Option 1 – Take ₹82 Lakh as Lumpsum and get monthly pension of 50,000 or
Option 2 – Take ₹2.40 Crore as Lumpsum and get monthly pension of 7,500
Observe that if you simply start withdrawing 42,500 per month from your excess corpus of 1,58,11,138 (approx. 1.6 Crore) and assume this is not getting any interest accrued on it, it will take you 373 months to exhaust the entire corpus which means approx. 31 years.
If you deposit this excess 1.6 Crore in a Bank FD at even 6% Rate of interest, you will earn a monthly interest of 80,000 (in reality it will be slightly less if you take monthly payouts). Along with that you will also have your capital preservation of 1.6 Crore which will remain with you and your heirs.
Part 7 – Calculator
If your organization has shared with you the amount (principal and interest) that you need to deposit to get the higher pension amount, then this calculator can help you take the decision. But don’t forget to watch the video for the TWIST.
Part 8 – The TWIST (Must watch Video before downloading Excel)
So, while it seems like taking the corpus away makes sense, but the following video will actually explain that it may not make sense for most people. Watch this video to understand the aspects.
Part 9 – Other Links
How to fill EPF Joint Declaration for Higher Pension Online?
EPS 95 Higher Pension Scheme – Eligibility Criteria
Part 9 – Download Excel
Before you Download
The Excel sheet is only an example and for reference. This is not approved by EPFO/EPS or any government agency. I may be wrong in these calculations so use your own judgement before making any decisions.
After Subscribing, come back to this page and click Download to get the file.
I had to move to Coal Mines Provident Fund for 15 months which is not covered under EPF. So out of 60 months before retirement, 15 months go blank in the excel sheet. In such a case, how will the average monthly wage be computed. is it total monthly salary of 45 months divided by 45 or is it total monthly salary of 45 months divided by 60
Hi
I downloaded the excel sheet. It is different from what was shown in the video. It does not have the hike component. I am seeing a different excel. Please send me the correct excel file used in the video
Thanks a lot for your effort.
I am not able to download the latest Excel which u r sharing in vdo.
The format seems different.
R u referring to any other Excel file?
This is wrong at so many levels. Pension is calculated on prorata basis.. So assume I worked from 1994 to 2019. As per you I should get pension based on last 5 year data. Nope… its not like that.
80% of my pension will come with 843 contribution & rest 20% from 1250.
Else people will pay less contribution & only in last 6 year change their contribution to higher no.
I actually calculated my mom pension based on my formula & it worked correctly.
If you really need more info, reply.. I will give more details but fix your blog
Can you please share the excel sheet?
The Excel sheet link is available in the post. Please check and click.
What I have stated is not my formula but the formula devised by EPFO and accepted by honourable Supreme Court.
What you have said is not incorrect, but it is applicable for cases of non-higher pension only and pro-rata will be applicabls.
In case of higher Pension, things have changed.
Again, I have never said I am correct and this is only my understanding. Exercise due diligence and caution while taking a decision for yourself.
Hi, can you provide me your calculator excel sheet.
I joined a company in 2008, My PF Salary was 3500, My pf salary was increased to 17000 in 2017 only . up to 2017 my pf salary was 6500 only. can i eligible for higher pension or not. Please clarify.
Please check my latest video where I have explained the criteria once again.
This is a theoretical case study. No one will get same salary from joining to retirement. Hence this example is not to be cosidered.
There can not be a practical approach as its individualistic in nature. Important point is about understanding the concept and then each needs to apply them in their own cases.
Hi sir, i Resigned from a Pvt bank in July 2018 , at the age of 44 after completion of 16 years of service with them and i have not taken up any other employment since then. I used to voluntarily contribute additional amount to my EPF account while i was working, I had already withdrawn my PF in the year 2018 after my resignation . Given this situation , am i eligible to apply for higher pension as per the recent supreme court judgement? Would be grateful for your guidance.
Pl take following case :
1. Dt of joining EPS 16 Nov 1995 at Salary of 10k
2. Dt of exit from eps 31 May 2020. Last salary 200k
Avg of last 5 month salary 150k
Q : while calculating Pension
A. Pension = 150,000 X (24+2)/70 = Rs 55714
B. Pension = Above formula but value 150000 will be = Average Pension calculated for Various salary for all the years from 1995 I. e. 10,000 to 200000
That means Pension taken as prorata ( as per existing rule) at various service years then avg of pension calculated
Please note that only limit of 6500 pr15 k has been replaced by actual wage but prorata wages has not been amended
Pl let us know which one A Or B is true?
Can you please attach the forms that need to be filled to opt for the higher pension option.
What would be your opinion in the fillowing case of a person Who :-
1. Was in service ans a EPF Member as on September 2014 and retired in July 2020 ;
2. His average monthly salary ( basic + DA) for the last 60 months ( From August 2015 tp July 2020 was one lac and eighty thousand rupees );
3. This person has a total no. of years eleigibble for pension is 16 years only,i.e, he was in service for 10 years prior to September 2014 (a case of lateral entry into service bya professional) and 6 years years after 2014 till his retirement on 31 july 2020.
Question: How much pension would he get if he ofted for higher pension in accordance with SC judgement? And how much money he has to deposit/pay EPFO now toavail higher pension( assume that the monthly salary of the employee to be Rs. 1.80 lac
thanks for providing excellent information. I request pl provide calculator for employees already retired in last 2-3 years and part of EPS. What is the recommendation to opt for higher pension or not ? How the calculator work ..