EPFO Higher Pension Scheme: What is it and should you apply for it?

Every employee contributing to the Employees’ Provident Fund Organisation (EPFO) has two accounts – an Employee Provident Fund (EPF) account and an Employee Pension Scheme (EPS) account. Each month, employees contribute 12 per cent of their salary plus Dearness Allowance (DA) towards EPF. An equal amount is also contributed by the employer, out of which 8.33 per cent goes into EPS and the remaining 3.67 per cent is deposited into EPF.

While this is how a pension scheme normally works, employees now have the option to increase their contribution towards EPS. Let’s find out more about this, and whether or not this is beneficial for you.

What is a higher pension scheme?

EPFO has recently announced changes to the higher pension scheme under EPS. As per the new provision, the additional 1.16% contribution from wages of members choosing a higher pension will be taken from 12% of the employer’s contribution. So, if the employee opts for a higher pension, the fund allocation to EPF and EPS will be adjusted, thus leading to a reduction in the EPF corpus but an increase in their EPS balance.

As per the new rule, the employer will contribute 3.67% of the employee’s basic salary, up to the wage ceiling, and 2.51% (3.67% – 1.16%) of their basic salary, above the wage ceiling, towards the EPF. The employer will also contribute 8.33% of the employee’s basic salary, up to the wage ceiling, and 9.49% (8.33% + 1.16%) of the basic salary, above the wage ceiling, towards EPS.

Thus, under the new rule, the employer will continue to contribute 12% of the actual basic salary. The only change is that the extent by which one’s EPS allocation increases will be the same by which their EPF allocation will reduce.

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Who is eligible to opt for the higher pension scheme?

All employees who are EPFO members and have completed 10 years of service are eligible for the higher pension scheme. Also, employees/employers who have contributed above the standard wage ceiling of Rs 5000 or Rs 6000 will also be eligible to apply.

If you are eligible for this scheme, you must apply for it by submitting the prescribed application form along with the required documents. The deadline to apply for this scheme has been extended from May 3, 2023 to June 26, 2023.

Should you opt for the higher pension scheme?

In the past, there was an upper limit applicable to pension income, which was linked to the basic salary. Basic salary was capped at Rs 5000, Rs 6500, and Rs 15,000 in 1994, 2001 and 2014, respectively. This salary cap has now been removed by the Supreme Court.

So, if your salary in the last 5 years has been on the higher end, your pension income will also be higher. With the higher pension scheme, you are likely to receive a higher annuity income post retirement. Moreover, it is a safer option for individuals seeking stable returns with lower risk.

From April 2022 to March 2023, EPF offered an interest rate of 8.15%, which is at par with what many fixed income investments currently offer. So, if you are nearing retirement, you can consider opting for the higher pension scheme to bolster your retirement planning efforts. But make sure to do the necessary calculations before opting for the scheme to decide whether or not it is viable for you.

(The author is CEO, Bankbazaar.com)