EPFO Higher Pension Scheme calculation process explained, check details

The EPFO's higher pension scheme, which has garnered significant attention in recent months, has been a topic of continuous discussion since the Supreme Court's decision last November. The Employees' Provident Fund Organization (EPFO) has extended the deadline multiple times for individuals to opt for a higher pension under the Employees' Pension Scheme (EPS), and now the deadline is fast approaching. EPFO has provided detailed information on how the calculation for the higher pension will be carried out. Let's delve into the details.

The Ministry of Labor had previously issued a clarification regarding the calculation of the higher pension. According to the Ministry, out of the total 12% employer's contribution to the PF, an additional contribution of 1.16% will be used to calculate the higher pension in accordance with the Supreme Court's decision on November 4, 2022. Additionally, the Ministry stated that this step to ease the burden on EPS subscribers will be applied retrospectively, meaning it will be applicable from a previous date, rather than from the day of its announcement.

EPFO has now provided detailed clarification on the calculation process. For individuals retiring before September 1, 2014, the pension will be calculated based on the average monthly salary of the 12 months prior to the retirement or exit from the pension fund. On the other hand, for those retiring after this date, the calculation will be based on the average monthly salary of the 60 months preceding retirement.

The deadline for opting for the higher pension scheme was initially set for May 3 but has been extended by EPFO until June 26, 2023. This is the second extension granted. Initially, the Supreme Court set the deadline for March 3, 2023. EPFO later extended it to May 3, and now the new deadline is June 26.

As per the Ministry's instructions, the Social Security Code states that employees' contributions cannot be allocated to the Pension Fund under the Employees' Provident Fund and Other Provisions Act. To comply with this regulation, an additional 1.16% will be deducted from the employer's 12% contribution towards the Pension Fund, which would have otherwise gone to the Provident Fund.

It's important to note that in the EPS, employees do not contribute directly. Out of the total 12% contribution made by the company, only 8.33% is allocated to EPS. Any remaining amount beyond this is directed towards the EPF. The Ministry of Labor has clarified that the increased contribution to EPS will be covered by the company's share, ensuring there will be no impact on the employee's take-home salary.

However, it's essential to consider potential drawbacks. Opting for the higher pension may result in a reduction in the amount deposited by the company into the PF, affecting the overall PF fund. Compound interest benefits apply to PF, but since a portion will now be directed towards EPS, the compounding benefits may decrease. Additionally, the lump sum amount received from PF upon retirement or leaving the job will also be impacted if the higher pension option is chosen.

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