The Employees’ Provident Fund Organisation (EPFO) has recently issued instructions laying down the procedures and manner in which to apply for higher pension under the Employees’ Pension Scheme (EPS).
This follows the Supreme Court order in November 2022 directing EPFO to offer this option to member employees.
One of the questions that employees, or subscribers, are struggling with is whether or not to go for the higher pension option.
The method of computation of pension is yet to be rolled out and then there are several other considerations which may be relevant for their decision. Here are some important aspects that may help employees while evaluating the pension option.
Calculating the pension
First of all, it is important to understand how the pension is calculated. Though a pension calculation tool is available, unfortunately, there is no tool available on the lines of tax calculators that indicate whether the old or new tax regime would be beneficial. Perhaps a tool to evaluate the higher pension option would have helped.
Pension is calculated by multiplying the pensionable salary with the pensionable service (number of years of contributions made to EPS) and divided by 70. The pensionable salary prior to the August 22, 2014 notification was defined as the average salary of the last 12 months. That has been changed to the average salary of the last 60 months through this notification. This change was also challenged which the Supreme Court (SC) upheld in favour of EPFO.
So, under the changed regulations, the subscriber’s pensionable salary may be lower where the salary was increased in the past 12 months, and the pensionable salary could be higher where in the past 12 months it was decreased.
Currently, a subscriber is eligible for pension where there is ten years of contributory service at the minimum. Else, a lump sum payout is made from the pension fund. So, it is important to see that one has enough number of years of service left before retirement to fulfil this 10-year contributory service criteria.
Basis of calculation
Pension is based on the contributions made to EPS. Where a subscriber chooses the higher pension option, the past contributions, along with interest, will get reallocated to EPS and accordingly the subscriber’s accumulated provident fund balance will get reduced.
Where the subscriber may need lump sum money to meet certain financial goals, such as children education or marriage, etc, the subscriber may continue with provident fund rather than pension, since lump sum money would be available on retirement or even earlier where the subscriber can take advance from the provident fund.
The tax angle
Taxation may also play a role here. Keeping money in PF may be more tax beneficial. Currently, withdrawal of accumulated balance of PF upon retirement after five years of contributory service is exempt from tax. However, pension received is fully taxable.
Additional pension contribution
It may be noted that EPFO, through the 2014 notification, had also sought additional pension contribution of 1.16 percent of salary exceeding Rs 15,000 per month. The SC did not turn down the right of EPFO to seek such additional contribution and ruled that the said amendment has to be brought in through legislative amendment in the laws for which it permitted a period of six months.
So, could there be any changes in future for the basis of pension calculation? That is hard to predict, but one should bear in mind that pension is based on the pension corpus and the return it earns.
Annuity plans
Last but not the least, though there are several annuity plans available which one can buy upon withdrawal from PF, but money lying with the government can give more comfort to subscribers due to the government guarantee for this scheme. This could also tilt many subscribers towards the pension option.