In the private sector, employees contribute a portion of their basic salary to the Employees' Provident Fund (EPF). Contributions to the EPF consist of 12% of the employee's basic salary and Dearness Allowance (DA), as well as 12% from the employer. However, in most companies now both these contributions are deducted from the employee's share.
A portion of the employer's contribution, amounting to 8.33%, is directed to the Employees' Pension Scheme (EPS). This pension fund is an important part of the retirement benefits accumulated during employment and serves as the basis for the monthly pension in old age after meeting all conditions. Nevertheless, the actual benefit from the EPS pension depends on the employee's pensionable salary, length of service, and prevailing rules. Therefore, it is crucial to understand how the pension is calculated within the EPS for retirement planning.
The monthly pension in EPS is calculated using a set formula: Monthly Pension = Pensionable Salary × Pensionable Service Period ÷ 70. The most significant factors in this formula are the pensionable salary and the pensionable service period.
For cases after September 1, 2014, the maximum limit for the pensionable salary for the standard EPS calculation is ₹15,000 per month. If an employee's pensionable salary is ₹15,000 and they have worked for 25 years of pensionable service, the calculation will be as follows: ₹15,000 × 25 ÷ 70 = ₹5,357.14. This means the employee can receive a pension of approximately ₹5,357 per month.
Calculating the annual payout, if the monthly pension is approximately ₹5,357, the total amount for 12 months will be: ₹5,357 × 12 = ₹64,284. Thus, in the example with 25 years of pensionable service and a pensionable salary of ₹15,000, the annual EPS pension will be approximately ₹64,284.
It is important to note that the pension is not calculated on the entire basic salary. One common misconception about EPS is the belief that the employee's entire basic salary is included in the pension calculation. This is not the case in the standard calculation. Even if an employee's basic salary is ₹20,000, ₹30,000, or more, the pensionable salary may be capped at ₹15,000 due to the applicable ceiling. In such cases, the pension is calculated based on the stipulated pensionable salary, not the entire basic salary.
There are separate rules and calculations for employees who meet the criteria for a higher pension. Consequently, the ceiling amount of ₹15,000 cannot be considered final for every employee with a high basic salary.