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Will EPFO's new calculation rules reduce pension? Understand complete multiplication

Amit Shukla | March 1, 2024 5:24 PM CST

The Employees' Provident Fund Organization (EPFO) is thinking of making new rules for higher pension calculations. Due to this, there is a possibility of a reduction in pension for the members of the Employees Pension Scheme i.e. EPS 95. There may be a reduction of 30-40 percent. This rule of pension calculation is pro-rata-based.

highlights

EPFO is considering new rules for pension calculation
These rules are based on a special type of pro-rata calculation
There is a possibility of a 30-40% reduction in pension for EPS-95 members.

New Delhi: Applicants of the Employee Pension Scheme (EPS 95) may get a shock. Media reports suggest that EPFO is considering new rules for higher pension calculations. These rules, based on pro-rata calculations, could potentially reduce the pension for EPS-95 members by 30-40 percent. PV Murthy, Head of Labor and Employment Practice, confirmed that the service period of employees opting for higher pension has been divided into two parts. However, EPFO has not officially said anything about this new method. Nor has any circular been issued regarding this.

Which people will be affected?

The pro-rata calculation for higher EPS pension will primarily affect members who are still working or have retired on or after September 1, 2014. Their service period will be divided into two parts for calculating the average pensionable pay. The first part covers the period from November 16, 1995 (implementation date of EPS-95) to August 31, 2014. The second part covers the period from September 1, 2014, till the date of retirement.

During the first part, the average salary of the last 60 months will be considered for pension calculation. For the second part, the average pay of the last 60 months or the average pay from September 1, 2014, to the date of retirement (if the date of retirement is before August 31, 2019) will be considered. The pension payable will be divided proportionately. Then it will be divided into two parts.

Fear of reduction in pension amount

Due to this new calculation rule, there is a possibility of a significant reduction in the pension amount. Before August 31, 2014, EPS contribution was limited to a maximum salary limit of Rs 6,500. From September 1, 2014, the maximum EPS contribution was increased to Rs 15,000. New members can contribute up to the new salary limit. Whereas the old members had a limited window to apply for Higher Contributions based on their actual salary. This led to a legal battle. Ultimately this fight reached the biggest court of the country. The Supreme Court ruled in favor of the old members. Allowed them to apply for higher EPS pensions.

However, there is a possibility of a reduction in the pension amount due to the pro-rata calculation rule. Since the salary was less before September 2014. Therefore, for most people, the average pensionable salary in the first period is likely to be very low. If this lower pensionable salary is included in the final EPS pension calculation on a pro-rata basis, it will reduce the total pension by 30% to 40%.

What could be the reason for the change in the calculation rule?

This view of EPFO seems to be contrary to the spirit of the Supreme Court order. The top court had said that the cut-off period imposed for exercising the 2014 option was invalid. The judgment restored the right of all eligible members to apply for higher pensions. PV Murthy believes that the pro-rata approach adopted by EPFO for higher pension calculation is not in the spirit of the Supreme Court decision.

It seems that the current move by EPFO is intended to indirectly reduce the pension amount by changing the pension calculation rule. This may be due to insufficient funds in the EPFO corpus. Members opting for higher pensions are worried as the actual pension they receive may be much lower than expected.

EPFO has not yet notified the new calculation rules. It must address the concerns of members applying for higher pensions. If the new method, when notified, puts retirees at a disadvantage, they can challenge it in appropriate legal forums, including the Supreme Court.