Some people who applied for it after the Supreme Court order in November 2022 are still waiting for the Employees’ Provident Fund Organisation (EPFO) to accept their applications.
Though, according to a 26 February statement, the EPFO aims to process all applications by 31 March 2025, employees continue to question the methodology for calculating the monthly pension.
Almost a decade-old confusion
In August 2014, the Centre amended the Employees’ Pension Scheme, 1995.
The amendment increased the cap on pensionable salary from ₹6,500 to ₹15,000 per month and restricted membership to the EPS to only those whose monthly salary on the date of joining was less than or equal to ₹15,000.
It required existing members for whom contributions were being made on a monthly salary above ₹6,500 to execute a fresh option jointly with their employer to contribute on the higher salary exceeding ₹15,000.
Also, members exercising such fresh option were required to contribute additional contributions at 1.16% of the salary exceeding ₹15,000.
More importantly, pension was to be determined on the basis of the average monthly salary drawn during 60 months preceding the date of the employee’s exit from the EPS membership.
The changes were to be effective from 1 September 2014.
However, the amendment was struck down by the Kerala, Rajasthan and Delhi high courts, and the case ended up in the Supreme Court.
The apex court upheld the amendment with certain riders. It allowed employees who were members of the Employees’ Provident Fund (EPF) on or before 31 August 2014 or had retired by that date to contribute 8.33% of their actual basic pay towards the EPS to earn a higher pension.
Both the employee and the employer contribute 12% of the employee’s salary (basic pay and dearness allowance) to the EPF. While the employee’s entire contribution goes to the EPF, the employer’s contribution is split between the EPF (3.67%) and the EPS (8.33%).
It also struck down the requirement to make additional contributions at 1.16% of the salary exceeding ₹15,000.
However, opting for the higher pension required employees to deposit balance contributions as per their actual basic pay for the past service period.
The methodology disconnect
Bengaluru-based Mahesh Kapoor did some calculations to determine if exercising the higher pension option would benefit him. He calculated his dues to the EPFO and the estimated monthly pension he would be eligible for upon retirement. He used the EPFO’s monthly pension formula—pensionable salary × pensionable service/70.
The calculations worked in his favour. He applied for it. However, he did not know how the EPFO would calculate the pensionable salary. “I was told the pensionable salary would be the average basic salary of the last 60 months before retirement,” he said.
However, the EPFO calculates the pension amount on a pro-rata basis, splitting the service period into two parts: i) from the date of implementation of the EPS, that is, from 16 November 1995 to 31 August 2014; ii) from 1 September 2014 till the date of retirement.
The EPFO uses the same methodology to calculate pensions for people whose contributions were as per the ₹15,000 cap. This is logical here because the maximum salary considered for EPS contributions was different before and after 1 September 2014. The cap has no role to play in cases where employees have opted for higher pensions.
“The pro-rata calculation requires separate computations for pensionable service before and after 1 September 2014. Part A will be the lower of the i) highest monthly salary earned before 1 September 2014 or ii) the average monthly salary of the preceding 60 months before this date. Part B will be the lower of i) the highest monthly salary earned after 1 September 2014 or the average monthly salary of the preceding 60 months before exiting the pension fund. An additional weightage of two years is added to the pensionable service before 1 September 2014 if the total service period is more than 20 years,” said Kunal Arora, founder, SKVC Consulting.
For example, Mr A, who joined the service on 2 January 2009, retired at the age of 58 on 1 January 2043. His average salary for the last 60 months before 58 comes in at ₹3.58 lakh. The total service period is 34 years, to which two years will be added.
If we calculate the pension without bifurcating the service period and consider the average monthly salary of the last 60 months, it will come in at ₹1.84 lakh. But, the EPFO will bifurcate the service period before and after 1 September 2014. In that case, the monthly pension would come in at ₹1.53 lakh. It is ₹31,119 or 17% lower than the non-bifurcated monthly pension.
“The pension is expected to be less by up to 30% for different employees if the EPFO splits the service period in two. Also note that the EPFO adds the two-year weightage in the service period before 1 September 2014, as per current calculations for higher pension. Adding it in the post-2014 service period could have increased the pension by 4-5% in some cases,” said Arora.
“The formula stated above is derived from circulars of the EPFO, its member portal, its demand letters and pension orders so far,” he added.
Further litigation
To be sure, a writ petition has been filed in the Kerala high court against the EPFO’s pro-rata calculation method, said Vikas Kumar, director, tax consultancy firm Vialto Partners.
An 18 January EPFO circular is relevant here. “The circular clarified that the pro-rata calculation has been provided in para 12 of the EPS Act, which is equitable and is treating both categories of pensioners (governed by wage ceiling as well as higher salary) on the same footing,” he said.
“The circular also mentioned that the Supreme Court did not find any issues in this methodology and the ministry of labour and employment has also agreed with the pro-rata computation,” he added.
Meanwhile, the Kerala high court has restricted the EPFO, in an interim order, from applying this method until its final order. It’s a wait-and-watch situation until then.
Ignoring it is not an option
If Mr A had not opted for the higher pension, his pensionable salary before and after 1 September 2014 would have been ₹6,500 and ₹15,000. If we calculate the monthly pension by splitting the service period in two up to his retirement at the age of 58 in 2043, it will come in at ₹6,788. This amount will be worth just ₹2,229 after 18 years, considering inflation at 6% per annum.
The endless delays
A meagre pension amount in the EPS drove people to exercise the option of a higher pension when it was open. Mumbai-based Ashok Prabhu, 59, did just that, along with 20 other employees from his firm. The employer cooperated with the process, but his application was rejected.
“They want us to share provident fund records as old as 35 years. I worked with two employers during this phase. We shared the documents with the EPFO, but it rejected my application, saying the employer had not furnished details. All 20 employees of my organization received the exact same response,” he said.
Kapoor faced a similar situation. “They are asking for records as old as 1995. I was not an EPS member then. It seems they deliberately want to reject higher pension requests.”
