Members of the Employees’ Provident Fund Organisation (EPFO) are eligible to receive pension if they satisfy certain conditions. Once the member has met the required conditions, the amount of pension they are eligible to receive will be calculated based on a formula provided in the rules of the Employees’ Pension Scheme (EPS).
Here is a look at when an employee is eligible to receive pension from EPF and how the pension amount is calculated.
When is an employee eligible to receive pension?
An individual will receive the pension benefit if he/she joined the Employees’ Pension Scheme, 1995 on or after November 16, 1995.
Further, an employee must complete minimum 10 years of contributory service to be eligible for receiving the pension. This means that active contribution must be made by the employer to the employee’s EPS account for at least 10 years. The total years of service can be with one employer or with multiple employers.
Saraswathi Kasturirangan, Partner, Deloitte India says “A member who has completed minimum 10 years of service is eligible for pension. He can start receiving pension from the age of 58 years. However, one has an option to opt for early pension from the age of 50 years if he retires or ceases to be in employment earlier. The EPS rule provides an option to defer pension beyond 58 years but not later than 60 years.”
What if a person has not rendered 10 years of contributory service?
When a person has not rendered 10 years of pensionable service on the date of exit or on attaining the age of 58 years, then he is entitled for a lump sum withdrawal or he may opt to receive scheme certificate provided on the date of exit if he has not completed 58 years. The quantum of lump-sum withdrawal depends on the number of years of contribution and is indicated in Table D of the EPS scheme.
The scheme also allows one to receive early pension from the age of 50 years or to defer the pension till the age of 60 years. However, when a member has opted to receive early pension or defer pension, the pension amount will get discounted or increased by 4% for every incomplete year for 58 years or for every year beyond 58 years as the case may be.
Also Read: How to withdraw money from EPS account
How much contribution is made to EPS account?
As per the scheme rules, a portion of the employer contribution to the provident fund is diverted to the pension scheme, and for this purpose, the wages on which the contribution is made is limited to Rs 6,500 or Rs 15,000 per month. If you have joined the EPS before September 1, 2014, then the maximum wage for contribution purposes will be capped at Rs 6,500 per month. For contributions made after September 1, 2014, the contributions are made on wage of Rs 15,000 per month.
Suppose you have joined the EPF scheme in January 2010, then from the date of joining the scheme till August 31, 2014, the monthly contribution will be as follows: 8.33% of Rs 6,500 = Rs 541. Effective from September 1, 2014, the contribution will be made as follows: 8.33% of Rs 15,000 = Rs 1250.
Calculation of EPS pension
Kasturirangan says, “The formula to calculate the EPS pension is as follows: Monthly pension amount= (Pensionable salary X pensionable service) /70.”
Pensionable service: This refers to the number of years for which contributions were made to the EPS account. As per the law, pensionable service must be rounded to the nearest year. This means that if the service is 6 months or more than it shall be treated as one year, and if the service is less than six months those six months will not be counted. If a person superannuates at the age of 58 years and has rendered more than 20 years or more of pensionable service, then his service period will be increased by weightage of 2 years subject to maximum 35 years of pensionable service.
Pensionable salary: This refers to the average of the last drawn salary. Kasturirangan says, “There is no clarity whether the pensionable salary is average of last 12 months or average of last 60 months. The pensionable salary, which was the average of last drawn 12 months’ salary was changed to the average salary of last 60 months salary (capped at Rs 15000 per month, effective from September 1, 2014, vide notification dated August 22, 2014. The Kerala High Court has quashed this notification since it resulted in curtailing the pension benefit, and the Supreme Court upheld these principles by dismissing the SLP filed against this decision. The EPFO, therefore, needs to come out with a clarification in this regard.”
Suppose contributions to the EPS account have been made for 14 years and 7 months and the pensionable salary is Rs 15,000.
The monthly pension amount will be calculated as follows:
(15,000 x 15) / 70 = Rs 3,214.28
EPS members must remember that if you have joined the scheme before 2014, then the monthly pension will be calculated on a pro-rata basis. The calculation can be explained with an example.
Suppose you have joined the EPS scheme in January 2010, and you leave the service in March 2025. Thus, till August 2014, you would have completed 4 years and 7 months service. Between September 2014 and February 2025, the completed service period is 10 years and 5 months. Further, assuming that pensionable salary is Rs 6,500 till August 2014 and Rs 15,000 from September 1, 2014 onwards.
First, the calculation of pension will be made for the period between January 2010 and August 2014 as follows:
(Rs 6,500 X 5 years)/70 = Rs 464. 28
The pension for the period between September 2014 and February 2025 will be calculated as follows:
(Rs 15,000 X 10 years)/70 = Rs 2,142.85
Thus, the total pension payable to you will be Rs 2,607.13 (Rs 464.28 + 2142.85).
Calculation of withdrawal benefit
As mentioned above, individuals have an option of withdrawal of contributions where the contributory period at the point of exit or on attaining 58 years is not 10 years. The withdrawal benefit in such cases will be calculated based on Table D as mentioned in the EPS scheme. It is a percentage-based calculation.
TABLE D for calculating lump-sum withdrawal
|Year of Service
|Proportion of Wages at Exit
Source: Employee Pension Scheme, 1995
Calculation of early pension
As EPS allows early pension from the age of 50 years, in such cases, the amount of pension will be reduced at the rate of 4% for every year the age falls short of 58 years. As an example, if you opt for pension at 51 years which is 7 years before the eligible age of 58 years, then the quantum of pension calculated will be reduced by 28%.
Minimum and maximum amount of pension
Kasturirangan says, “Under EPS, the minimum pension amount is Rs 1,000 per month and maximum amount of pension that you are eligible to receive Rs 7,500 per month on the basis that the pension contribution is not made on the amount beyond the statutory ceiling.”