Higher Pension Scheme in EPFO: Guidelines and Eligibility

What Is the Higher Pension Scheme in EPFO?

This higher pension scheme is designed to allow the EPF members to add money from their actual salary and DA to the EPS instead of making the max allowed payments of ₹5,000 and ₹6,500, and later on ₹15,000. Here is how the contributions differ under normal EPS rules:

Under normal EPS rules:

• The pension contributions are allowed until the wage ceiling
• If the salary goes higher, the pensionable salary cannot exceed the decided amount

Under the higher pension option:

• The contributions need to be calculated based on actual salary
• The higher contributions lead to higher pension amounts after retirement

Background of the Higher Pension Option

The EPS used to limit the pension contributions under a wage limit to ensure the benefits are the same for all the members, but the employees who contributed higher amounts with high salaries wanted more benefits, such as a pension that matches those contributions.

After judicial evaluation, it was clarified that the employees who had a joint option with the employers could get a pension that was based on their actual salary and not just the capped limit. So the EPFO issued guidelines to add this option in a structured manner.

Eligibility Criteria for Higher Pension EPFO

The higher pension mechanism is only available to a specific category of employees and does not provide pension benefits to everyone.

Eligible Members Include:

• The members who were members of EPS before 1st September 2014
• The employees who contributed to the EPF with their actual salary, which exceeded the wage limit
• The employees and employers who used the joint option under the EPS provisions
• The members who remained in service after the 2014 amendment

Not Eligible:

• The EPF members who joined the EPF after the 1st of September 2014, with a salary above ₹15,000, but did not join the EPS
• The members whose contributions did not exceed the statutory wage ceiling
• The members who withdrew the EPS benefits before they were able to qualify for the service

How the Higher Pension Contribution Works

Under the EPS services, the contributions of 8.33% are calculated into the pension.

• Normal EPS Contribution (Capped): If the salary is ₹50,000, then the EPS contribution is capped a limit of ₹15,000.
• Higher Pension Contribution: The EPS contribution is calculated on a ₹50,000 salary and not at the limit of ₹15,000 as it leads to an increased pensionable salary and the pension payout.

As the additional contributions from the member go into the EPF share, it reduces the PF accumulation a little.

Key Guidelines Issued by EPFO

The EPFO has operational guidelines to make it easier to implement the higher pension option. Here are the guidelines:

1. Joint Option Requirement: The employees need to submit a joint declaration with their employer to request a pension on their actual salary.
2. Reallocation of Contributions: The additional amount of money required for the EPS is moved from the EPF accumulation.
3. Interest Adjustment: The differential contributions by the members may be calculated with applicable interest.
4. Digital Application Process: The EPFO allows the members to submit higher pension requests online.
5. Verification of Past Contributions: The salary and contribution records are reviewed and checked before getting approved.

Benefits of Opting for a Higher Pension EPFO

Below are the benefits for the members if they choose a higher pension EPFO option:

1. Significantly Higher Monthly Pension: The pension is linked to the salary, which removes the wage limit and increases the retirement income for the members.
2. Better Income Security After Retirement: A bigger pension amount reduces the dependence on personal savings or the market-linked investments of the member.
3. Lifelong Pension Protection: The EPS provides lifelong benefits to the eligible members and also provides survivor benefits to their spouse and dependents.
4. Inflation Cushion Through Higher Base Pension: The EPS does not provide an adjustment for inflation, but the higher pension amount makes it easier to adjust long-term.

Trade-Off: Impact on EPF Corpus

The trade-off here is that the pension increases, but the EPF savings will be reduced in the long run because of the following:

• A big portion of the employer contribution is moved to the EPS
• The EPF accumulation grows more slowly

Members must weigh:

• The members need to see if they want a higher monthly income after retirement and if a lower retirement corpus works for them

Higher Pension Calculation Method

EPS pension is calculated using the statutory formula:

Monthly Pension = (Pensionable Salary × Pensionable Service) ÷ 70

Under Normal EPS

Pensionable Salary = Wage ceiling (₹15,000)

Under Higher Pension Option

Pensionable Salary = Actual average salary (last 60 months)

Example Calculation

This demonstrates the substantial impact of removing the wage cap.

EPF Balance Check - Quick Access

It is important for the active members to update their EPFO contact details and KYC to help track the provident fund savings. The members can check their PF balance using the following official and approved methods of the EPFO:

• UAN Member Portal: You can log in with your UAN and password to check your PF balanceand member passbook.
• UMANG App: You can download the government UMANG mobile app and access the EPFO services.
• Missed Call Service: You can give a missed call to 9966044425 from your registered mobile number to check your PF balance via SMS.
• SMS Service: You need to send an SMS with the text "EPFOHO UAN ENG" to 7738299899 to get your EPFO balance details.

Application Process for Higher Pension

Knowing the application process for the higher pension requires the members to follow the official EPFO application process:

1. Log in to the EPFO website using their credentials
2. Select the higher pension application option
3. Submit the joint declaration with the employer
4. Submit the wage and contribution details from both the employee and the employer
5. Wait until the EPFO verifies the details
6. Differential contributions are recalculated

Documents Required

Here is what the members may need to submit for a higher pension from the EPS:

• UAN number
• Joint option declaration with the employer
• Salary records
• Contribution history
• Employer certification
• Proof of EPS membership before the cutoff date

Who Should Consider Opting for a Higher Pension?

The option of a higher pension is not suitable for every employee, as not everyone qualifies for the benefit; it is more suitable for the following employees:

• Had high salaries during their employment years
• They want to have a guaranteed income instead of accumulated lump-sum savings
• They have a long service period under the EPS

Who Should Evaluate Carefully Before Opting?

The members need to check the following things before choosing the higher pension option:

• If they want a bigger EPF corpus for flexibility when retiring
• Do not have a long period of service remaining
• They plan on retiring early
• Rely on diversified investments instead of pension income

Key Considerations Before Exercising the Option

Here are the considerations the members need to make before choosing the higher pension option:

• The pension is taxed
• EPS contribution might lead to a smaller EPF corpus
• The option is a long-term choice that cannot be reversed
• Requires the employer to contribute accurately
• The amount of pension depends on the total pensionable service rather than the complete period of employment

Common Misunderstandings About the Higher Pension EPFO

Here are a few misunderstandings the members need to clear up before choosing the higher pension under the EPFO:

• It is not a new pension scheme but rather an option under the EPS
• It does not increase the employee contribution directly
• It distributes the employer's contribution between the EPF and EPS
• It benefits only eligible members, not all EPF subscribers

Conclusion

The higher pension EPFO option shows how the eligible employees who want a stronger retirement income under the Employees' Pension Scheme can get it by allowing the pension calculation on the actual salary instead of the capped wage ceiling. It gives the members a higher and lifelong pension benefit, but they need to check their service history and financial goals and develop a suitable retirement strategy. The higher pension schemes have a reduced EPF corpus, so the members need to check the details carefully before choosing the pension to ensure it aligns with their future savings and financial goals and provides them with consistent income security.