In this story, we will explore how the current contribution under the EPFO and likely increase in the EPF wage ceiling as expected can lead to a decent pension of as much as Rs 10,000 per month post retirement at the age of 58.
Despite the current EPFO wage limit of Rs 15,000, members of the Employees’ Provident Fund Organisation (EPFO) can still retire with a monthly pension of nearly Rs 10,000 under the Employees’ Pension Scheme (EPS). In this story, we will explore how the current contribution under the EPFO and likely increase in the EPF wage ceiling as expected can lead to a decent pension of as much as Rs 10,000 per month post retirement at the age of 58.
The EPFO manages both pension scheme (EPS 95) as well as the provident fund for employees. In case of companies with their own PF Trusts, they manage the provident funds themselves but have to follow the rules set by the EPFO.
Besides fixing various guidelines and interest rates on PF deposits, the EPFO periodically fixes the wage ceiling based on which the EPF and EPS contributions are decided. At present, the wage ceiling for EPF and EPS contributions is Rs 15,000, The same was Rs 6,500 in 2014. The EPFO wage ceiling suggests that even when the basic salary is more than the current limit of Rs 15,000, an employee’s pension benefits will be calculated based on the Rs 15,000 limit.
Now, it is expected that the government may soon hike this wage ceiling limit to Rs 21,000, for which Union Labour Minister Mansukh L Mandaviya recently gave indication without mentioning the exact hike.
A few months back, FE Online learnt from sources that the union labour ministry sent a proposal to the finance ministry to hike the wage ceiling for EPS contribution to Rs 21,000 from the current Rs 15,000.
Read More: Withdraw Your PF Money Using UMANG App, Check Step-by-Step Guide
Key eligibility conditions for EPS pensions
To become eligible for pension under EPFO, one must complete at least 10 years contributing as an EPS member. The pension starts under the EPS at the age of 58.
To calculate your EPS pension, key points are – maximum pensionable salary and maximum pensionable service.
Average pensionable salary: Pensionable salary is the average monthly salary that an employee earns under the EPS over a specific period. The maximum salary considered for EPS calculation is Rs 15,000.
Maximum pensionable service: This is the total number of years an employee works and contributes to EPF and EPS. One can have a maximum of 35 years of service considered for pension calculation.
Read More: How to calculate your EPS pension: A simple guide for retirees
What is the formula to calculate EPS pension?
EPS = Average pensionable salary x pensionable service/70
In September 2014, EPFO changed the formula for calculating EPS pensions. Before that, the average basic salary from just the last year of service was used.
Here, we’ll calculate the pension for an employee who joined a company in January 2015, after the wage ceiling was increased to Rs 15,000. We’ll assume the next wage ceiling revision will occur in January 2025. The employee plans to retire in 2049 after completing the maximum pensionable service period of 35 years.
Here the calculation can be divided into two parts:
First part: From January 2015 to December 2024 (10 years) with the wage ceiling of Rs 15,000.
Second part: From January 2025 to December 2049 (25 years) with a new wage ceiling of Rs 21,000.
The formula for calculating the EPS pension is:
EPS = Average pensionable salary × pensionable service/ 70
Part 1: (Pension calculation for 10 years)
Average pensionable salary: Rs 15,000
Pensionable service: 10 years
Pension = Rs 15,000×10/70 = Rs 2,142.86 per month
Part 2: (Pension calculation for 25 years)
Average pensionable salary: Rs 21,000
Pensionable service: 25 years
Pension = Rs 21,000×25/70 = Rs 7,500 per month
Total pension after 35 years of service = Rs 2,142.86+ Rs 7,500 = Rs 9,642.86 per month.
Note: The above calculation of a likely pension is based on this assumption that the EPFO will revise upwards its wage ceiling limit to Rs 21,000 so effectively, a part of pensionable amount will be calculated on the basis of Rs 15,000 EPFO wage limit and the second part of calculation will be based on Rs 21,000.
