Higher pension calculation: Should you opt for higher pension per EPFO’s new formula? It’s complicated

A big uncertainty in re-calculating contributions to be eligible for higher pension is the amount of money you would need to keep aside if you opt for higher pension.

The Employees’ Provident Fund Organisation (EPFO) has now specified the method for computing pension based on one’s actual salary, instead of the statutory limit of Rs 15,000.

According to the retirement fund organisation’s latest circular, 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). In the case of those who retired or will retire post this date, the pension will be calculated on the basis of average monthly pay during the 60 months immediately preceding retirement.

Currently, the calculation: pension = pensionable salary (average of last 60 months’ salary) x number of years of contribution / 70. Prior to September 1, 2014, the definition of pensionable salary was the average of the last 12 months’ salary. Here, salary refers to your basic salary, on which your EPF contribution is calculated.

Also read: Moneycontrol's complete guide to Employees' Provident Fund

‘Formula as of now’

In its November 2022 order directing the EPFO to allow employees to avail of higher pension, the apex court had allowed the EPFO the right to revise the formula to compute pension in future.

Thus, despite the formal disclosure of the pension formula, taking a call on whether or not to opt for higher pension on actual salary has not become easier, say experts. “The biggest concern is that the government could change rules in future, which may not be far away. Employees might make the decision based on today’s formula, but the definition of pensionable salary could change later if laws are amended. The EPFO circular states that the formula is applicable ‘as of now’. It does not rule out the possibility that it could be amended in future,” says Saraswathi Kasturirangan, Partner, Deloitte India.

The definition of pensionable salary was changed with effect from September 1, 2014, when, instead of 12 months’ average salary, 60 months’ average salary was brought into the equation, which translates into lower pension.

Also read: NPS or EPF - which is better?

“They have merely restated the method of computation as contained in the existing provisions,” says Kuldip Kumar, personal tax expert and Partner, Mainstay Tax Advisors.

Also, the practical challenges that employees and retirees are facing continue to persist. "Many do not have access to old employment data or salary slips needed for computing how much money will get transferred from their EPF to their EPS account. But the EPFO has these details, so they should be able to populate the data and help members (employees) see how much money will get transferred to EPS if one chooses to avail of  pension based on one’s higher salary,” adds Kumar.

List of documents

Employees need 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. Field officers are to scrutinise these joint applications.

In the absence of proof of having exercised the joint option with their employer in the past — which many employees have found difficult to furnish — the EPFO has directed its officers to verify certain other documents.

These include wage details submitted by the employer, authenticated salary slips, or a letter from the employer and a copy of the joint request.

Employees can also submit letters from the provident fund office indicating PF contribution on actual wages before November 4, 2022, the date of the Supreme Court order, which allowed employees to contribute to (and avail of ) pension based on one’s actual salary.

Also read: How to link your EPF's UAN with Aadhaar

At the time of final settlement, those who have contributed to the pension fund based on their actual, higher salary might have to submit proof of the joint application, or employer’s undertaking, certifying pension contribution based on actual salary.

“EPFO has brought in the requirement of employees having to submit proof under para 26 (6) of the EPF Scheme, at the time of final settlement of their higher pension claim.  This requirement has been subject to some controversy in the past with the Kerala HC stating that not having this document should not obviate the higher pension claim. This could add to the practical challenges that employees may face while realising their claim to higher pension,” says Sowmya Kumar, Partner with law firm IndusLaw.

For employees, the deadline for choosing the higher pension option under the Employees’ Pension Scheme (EPS) is June 26, which was extended from May 3 earlier.

It will then have to be validated by the employer, followed by EPFO’s field officers. They will have to verify the uploaded data and documentation within 20 days of having received the application.

Show me the money

A big uncertainty is the amount of money you would need to keep aside if you opt for higher pension. Employees are struggling to calculate the funds that will have to be transferred retrospectively from their provident fund accounts to make up for any shortfall in EPS contribution over the years.

“It is important to have clarity on the quantum of funds that will flow out from the PF account, and understand the pension that one could expect to receive. Many employees do not have access to past salary and contribution data to figure out the sum that will have to be transferred from provident fund to the EPS,” explained Kasturirangan.

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Besides the uncertainty, employees have to take several other factors into account. “For instance, your current health status. What if you do not survive till, say, the age of 75? Your spouse will be entitled to only 50 percent of the pension in case of your death. The balance corpus will not be returned to your dependents or heirs. So, you have to ascertain whether it is worth transferring a significant chunk from your PF corpus retrospectively to claim higher pension,” says Kumar.