What is Pension Calculation Formula for Private Employees?

Understanding how to calculate pensions under EPS is simple. By applying the required values in the pension calculation formula , you can determine the pension amount you will be entitled to after you reach 58 years of age. Employees Pension Scheme (EPS) Formula The old pension scheme calculation formula under EPS was:Pensionable Salary * Pensionable Service / 70 where,

• Pensionable Salary – Average monthly salary for the last 12 months before exiting EPS (capped at ₹6,500 before 2014, later increased to ₹15,000).
• Pensionable Service – Total years of contribution to EPS (minimum 10 years required for pension eligibility).

The revised pension calculation formula is: Average Salary * Pensionable Service / 70 where,

• Average Salary means the average of the Basic Salary + DA combined, drawn in the last 60 months, and
• Pensionable Service means the number of years worked in the organized sector after 15th November 1995. (For employees working before 15th November 1995, the formula will be different)
• Employees opting for a higher pension must transfer 8.33% of their actual salary (above ₹15,000) retrospectively from their EPF account to EPS.

This change allows employees to receive a significantly higher pension but requires additional contributions. Employees Pension Scheme (EPS) Calculation Let’s consider the maximum pension scenario keeping in mind the following:

• Maximum Average Salary (Basic Salary + DA) considered for EPS is Rs.15,000
• Maximum Pensionable Service considered for EPS is 35 years

So, upon applying the pension calculation formula , (15000 * 35 / 70) = ₹7,500 per month is the maximum pension that one can earn through EPS.Some points that are noteworthy here are:

• The minimum pension that a person can earn under EPS is ₹1,000 per month.
• It may happen that you do not stay in one organization throughout your career. As you change jobs, new EPF accounts are created , which results in new EPS accounts being introduced under the same. So, by the time you finish your work life, you may have multiple EPS accounts. However, you will not receive multiple pensions as you are eligible to receive only one pension. Instead, all your accounts will be merged and then your pension calculation will be processed.

How Does Employee's Pension Scheme Work? Out of the total contribution made towards the provident fund by the employee that is 12% of the salary, not the entire amount is diverted to the PF. A part of it, which is 8.33% of the salary goes to the EPF . Considering the basic salary capped at ₹15,000, for salary above the capped limit ₹1250 is contributed each month towards EPF. Earlier the capped salary amount was ₹6,500, exceeding which the EPS amount was ₹541. Who Contributes Towards Your Pension? You do not contribute towards your EPS, instead, your employer and the Government do in specific percentages. According to the law, the contributions are made in the following proportion by the respective contributors:

• Your Employer matches your contribution towards EPF, out of which 8.33% goes towards the EPS
• Government of India contributes 1.16% of your Average Salary (Basic Salary + DA)

In the case of the employer’s and the Government’s contribution, the total of Basic Salary + DA is considered to be a maximum of ₹15,000. This means that your employer will not contribute more than ₹1,250 (8.33% of 15,000) per month and the Government will contribute no more than ₹174 (1.16% of ₹15,000) per month towards your EPS.If your Average Salary is more than ₹15,000, the Government will cease to contribute towards your EPS. Instead, you will be funding the 1.16% yourself towards your EPS.Your post-retirement life is the time to unwind, sit back and relax. You wouldn’t want to worry about your finances at that time. Hence, you must know how to calculate pension beforehand so that you are not met with any unwarranted surprises in your golden years.

To qualify for benefits under the Employees’ Pension Scheme (EPS), an individual must meet these conditions:

• Must be an EPFO member.
• Should have a minimum of 10 years of active EPS contributions, whether with one or multiple employers.
• Must have reached 58 years of age.
• Early withdrawal of EPS is possible from the age of 50 but at a reduced rate.
• Pension can be deferred until 60, with an additional 4% increase for each extra year.

Understanding these criteria is essential for applying the pension calculation formula accurately. What If You Haven’t Completed 10 Years Of Contributory Service? If, due to some reason, you haven’t completed 10 years of contributory service till the age of 58 or by the date of your retirement from the company, then you can withdraw the lump sum amount or choose to receive a scheme certificate on the date of exit. How Much Contribution Is To Be Made Towards The EPS Account? According to the scheme, a part of the employer contribution towards the provident fund goes to the pension scheme. Hence, the wages on which contribution is made are capped to the limit of Rs. 6,500 or Rs. 15,000 per month, which directly impacts the pension calculation formula . If you have joined the scheme before 1st September 2014, then your maximum wage contribution will be RS. 6,500 per month. However, if you have joined the scheme after 1st September 2014, then your maximum contribution towards pension per month will be Rs. 15,000.

As we know, the pension calculation formula is: Member’s Monthly Salary = Pensionable salary X Pensionable service / 70 1. Pensionable salaryThe average salary that you draw in the last 12 months before exiting the EPS scheme is pensionable salary. The non-contributory days if any, will not be considered in this.2. Pensionable servicePensionable service is basically the actual service period of the member. As an employee, you need to get the EPS certificate and submit it to the new employer every time you switch to a new job.

1. Receive pension on retirementOnce you complete 58 years of age, you become eligible to retire. If you have served the mandatory 10 years of service period in the company, then you can avail the pension after retirement.2. Receive pension on leaving service before becoming eligible for monthly pensionIf you have served the mandatory 10 years of service period, then you can withdraw the entire pension fund before completing 58 years of age.3. Receive pension on total disablement within the service tenureAs a member of the EPFO, you receive a monthly pension in the event of permanent disability.4. Pension for the family after youIn case of death, your family dependants will receive the monthly pension.

1. Widow PensionIn this case, the widow of the member of EPS receives the pension.2. Child PensionIn this case, the widow and children of the member of EPS receive the pension.3. Orphan pensionIn this case, the children of the member of EPS receives the pension.4. Reduced pensionIf you have withdrawn an early pension, then the pension you receive in retirement is slashed by 4% every year.

As a member, you can check the balance amount in your EPS account with EPF Passbook. In the last column of the passbook, you will find EPS contribution deposited by the employer every month. You can also log into the EPS Passbook portal and check the status online.

• The employer makes a contribution of 8.33% of the employee’s pay for EPS
• All the contributions made in the Employees’ Pension Scheme (EPS) account are to be done by the employer
• The employer must make the contribution within 15 days of the close of every month
• The employee’s pay consists of basic wages with dearness allowance, retaining allowance and admissible cash value of food concessions
• All applicable contribution cost must be paid by the employer
• The pension calculation formula considers the employer’s contributions, pensionable salary, and total years of service to determine the monthly pension amount