On 1 June 2023, EPFO clarified how pensions based on high wages under the pension scheme are calculated. Let’s take a closer look at the topic of high annuities.
What are the higher pension options?
A higher pension option means that the employee has chosen a higher allocation of the employer’s contribution to the pension plan. As long as employers’ contributions are allocated to pension schemes according to higher salaries, this corpus Provident fund system descend. There are no additional costs for employers or employees to take advantage of higher pension options. It should also be remembered that under the pension plan, the employee is eligible to receive a monthly pension when she reaches the age of 58. reserve fund Under this plan, employees are eligible for lump sum withdrawals upon retirement or upon certain events.
Higher EPS Pensions: EPF and Welfare Pension Plans – What to Choose | Calculating EPS
(The video above was released before EPFO announced the pension formula, but it provides a detailed and brief discussion on the topic of high pensions and PF expenditures.)
What are the advantages of higher annuity options?
Under the pension plan, an employee is entitled to receive a monthly pension after reaching the age of 58, provided that the employee has completed 10 years of eligible service. The formula for calculating the monthly pension amount is (pensionable salary x pensionable service)/70.
Pension period is the period of service during which contributions are made under the pension plan.
For example, for 35 years of service (20 years before September 2014 and 15 years thereafter), the monthly pension could be Rs 5,071 if the employee did not choose a higher pension. But if the employee chooses a higher pension, for example, if her five-year average base salary until retirement is her Rs.100,000, her monthly pension may be Rs.50,000. This begins when the employee reaches the age of 58 and continues until the employee dies. After the employee’s death, the spouse receives 50% of it as a monthly widow’s pension, and up to two children under the age of 25 receive 25% of the widow’s pension as a monthly child pension (if there are no children, receive 75% of the widow’s pension for each child). )
How much is allocated for contributions from the Provident Fund Plan to the Pension Plan?
If the employee chooses a higher pension, almost 9.49% of the base salary will be allocated to the pension plan from the employer’s contributions.
Of this, 8.33% of the monthly base salary will be reallocated from the date the employee begins contributing base salary in excess of the statutory maximum to the provident fund plan until the date of retirement. In addition, 1.16% of the monthly base salary above the statutory cap will be reallocated from September 1, 2014 until the date of retirement.
For example, if an employee does not opt for a higher pension, for example, if the base salary is Rs.100,000, only Rs.1,250 will be allocated to the pension plan and the remaining Rs.22,750 will be allocated to the Provident Fund. However, if the employee chooses a higher pension, Rs. 9,316 per month will be allocated to the pension scheme and the balance of Rs. 14,684 will be allocated to the provident fund.
Who is eligible to receive a higher pension option?
Current employees of organizations first hired before September 1, 2014 are eligible to receive higher pension options. Also, employees who leave the organization after September 1, 2014 are eligible to receive a higher pension, provided they were first hired before September 1, 2014. In both cases, the employee should not have opted for a high pension in the past, contributing more than Rs 15,000 per month to the provident fund.
Employees who left the organization prior to September 1, 2014, had exercised such options prior to September 1, 2014, and such options were denied by the provident fund authorities. Only are eligible to receive the higher annuity option.
Who is not eligible to receive higher pension options?
Employees first hired on or after September 1, 2014, or employees who retired before September 1, 2014, are not eligible for the higher pension option.
How can I apply for a higher pension option?
Employees are required to submit an online application to the EPFO portal with specific details of their past participation under the pension plan. The employee must also attach a copy of the provident fund passbook and a pledge to deposit contributions along with interest for past periods in the event of a shortage of the provident fund balance.
Once the employee has submitted the application, the employer must review and approve the application. Employers are also required to provide details of wages paid to employees for each month the individual was employed by the organization.
According to the EPFO circular dated 11 May 2023, pensioners/members will have three months to deposit their historical corpus and agree to divert funds from the provident fund to the pension scheme. If an employee’s provident fund balance is insufficient, the employee must deposit funds into her EPFO from the bank account on her EPFO record. Such deposits can be made online if such facility is provided by EPFO or by check.
Is there anything employees should keep in mind?
Employees should remember that choosing a higher pension will reduce the lump sum withdrawal under the provident fund and increase the monthly pension under the pension plan. However, under the pension system, the person, his/her spouse, and children under the age of 25 are only paid a monthly pension, after which there is no refund of the pension.
(Author is a partner of People Advisory Services at EY India. Opinions are personal)
