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Provident Fund (EPF) money is deducted every month from the salaries of crores of salaried employees working in the private sector. People usually see this fund deposited in the EPF account as a lump sum fund to be received at the time of retirement, but most of the employees do not have the correct information that a part of their salary is also deposited in the Employees Pension Scheme i.e. EPS-95. According to the rules of the Employees Provident Fund Organization (EPFO), employees working in the organized sector get the right to monthly pension for life on completing the age of 58 years. In such a situation, the question arises again and again that if an employee has worked continuously for 25 years or 30 years, then how much pension will come in his account every month after retirement.
Before understanding the mathematics of pension, it is important to know where and in what proportion the PF money deducted every month goes. As per rules, 12 percent of the employee’s basic salary and dearness allowance (DA) is deposited directly into the Employees Provident Fund (EPF). Along with this, the employer i.e. the company also contributes 12 percent of the employee’s basic salary. However, this entire 12 percent of the company does not go to EPF, rather it is divided into two parts. Out of the company’s 12 percent contribution, 8.33 percent is transferred to the Employee Pension Scheme (EPS) and the remaining 3.67 percent is added to the EPF account. From this 8.33 percent share, the government and EPFO together create a pension fund, from which lifelong monthly pension is paid on retirement.
Under EPFO rules, the normal monthly pension received at the age of 58 years is calculated on the basis of a fixed standard formula. The official formula is as follows:
Monthly Pension = (Pensionable Salary × Pensionable Service Period) ÷ 70
Here ‘Pensionable Salary’ means the average basic salary and dearness allowance of the employee for the last 60 months (5 years). As per current EPFO rules, the maximum wage ceiling for EPS contribution has been fixed at ₹15,000 per month. This means that even if your actual basic salary is ₹50,000 or ₹1,00,000 per month, if you have not opted for higher pension, your salary will be considered as ₹15,000 for standard pension calculation. Whereas ‘Pensionable Service’ means the total period for which you have contributed to the EPS.
A special rule of EPFO proves to be quite beneficial for those employees who work in the organized sector for a long period. As per EPS rules, if an employee completes 20 years or more of pensionable service, an additional bonus weightage of 2 years is added to the total service period while calculating his pension. Its direct benefit is that the pension is decided considering the service period of a person working for 25 years as 27 years and the service period of a person working for 30 years as 32 years, due to which the amount of monthly pension increases.
If a private employee has completed a total of 25 years of service with EPS contributions and is retiring at the age of 58, his pension calculation will be as follows:
Pensionable salary = ₹15,000 (maximum statutory limit)
Total service period = 25 years
Bonus for more than 20 years of service = 2 years
Total pensionable service = 25 + 2 = 27 years
Pension Formula: (15,000 × 27) ÷ 70 = ₹5,785.71
Thus, on completion of 25 years of service, the employee will receive approximately ₹ 5,786 per month as lifetime pension.
If an employee works continuously for 30 years of his career under the ambit of EPF and EPS, then the calculation of pension for him will be as follows:
Pensionable salary = ₹15,000
Total service period = 30 years
Bonus weightage = 2 years
Total pensionable service = 30 + 2 = 32 years
Pension Formula: (15,000 × 32) ÷ 70 = ₹6,857.14
This means that an employee retiring after 30 years of long service will be provided a pension of approximately ₹ 6,857 every month by EPFO. Considering the maximum service limit of 35 years, the maximum amount of normal EPS pension under the current ceiling of ₹15,000 can be only about ₹7,500 per month.
EPFO gives employees the option to take pension even before 58 years of age, which is called Early Pension. For this, it is mandatory to have completed at least 10 years of service and be at least 50 years of age. But if the employee starts pension before the age of 58 years, he has to face a permanent penalty of 4 percent every year. For example, if an employee starts taking pension at the age of 55 (3 years earlier), his fixed pension will be reduced by 12 percent (4% × 3) for the lifetime. Therefore, financial experts always recommend that unless there is an extreme emergency, one should not claim pension before completing the age of 58 years.
People often change companies during their career in the private sector. In such a situation, many employees transfer only the EPF balance while joining a new organization and do not pay attention to the transfer of EPS. Continuity of service is the most important condition for pension eligibility in EPFO. If you change jobs, it is mandatory to merge the service history of the old company with the new company through your Universal Account Number (UAN) and keep the record of ‘Scheme Certificate’ updated. Your total pensionable service is determined by adding the service period of different companies, due to which you get the benefit of 2 years bonus weightage on completion of 20 years and uninterrupted lifelong pension on retirement.