Employee Provident Fund Organization (EPFO) recently pushed the deadline to apply for higher pension from Employees’ Pension Scheme (EPS) to June 26, 2023. 

The deadline was earlier set at May 3, 2023. The new rule allows the subscriber to increase the monthly pensionable salary (to actual basic salary), which was earlier capped at Rs 15,000. So should you?

What are the new pension rules?

EPS is a scheme backed by the Government of India under which its subscribers receive pensions for life. Both the employee and employer contribute 12% of basic monthly salary (including dearness allowance, if any) towards EPF. 

While the entire share of the employee goes towards EPF, the employer contributes 8.33% towards EPS and 3.67% towards EPF contribution every month. However, since the maximum amount was earlier capped at Rs 15,000 a year (or Rs 1,250 a month), the excess amount was transferred to EPF.

The new rules recently came into effect when the Supreme Court gave a verdict in favour of several employees’ unions challenging the earlier rule introduced on Sep 1, 2014.

Under the new rules, there is no absolute ceiling on the EPS contribution. The higher the basic salary, the higher would be contribution to EPS and to the full extent of 8.33% of one’s basic salary.

How will it affect your pensions?

The monthly pension on retirement is calculated based on ‘pensionable salary’ and pensionable years in service.

The formula for calculating monthly pension amount is:

Pensionable salary X Pensionable service (years)/70

While computing pensionable salary, the average monthly salary in the last 60 months is taken into consideration.

For instance, if your average monthly basic salary in the last five years of service is Rs 1 lakh and you have worked for 35 years, your monthly pension on retirement would work out to Rs 50,000 a month (Rs 1 lakh X 35/70)

Earlier, the pension amount was capped at Rs 7,500 a month (Rs 15,000 X 35/70)

Who’s eligible?

The option for ‘higher pensions’ is available only for employees, who were members of EPS on September 1, 2014. Moreover, to avail pension one needs to complete at least 10 years of service. 

However, you can opt for early retirement to draw pensions at 50 years or later instead of the usual 58 years. Pension is available for life for the employee subscriber and at 50% of its value to their spouse after their death.

Should you go for higher pensions?

A lot depends on your personal financial situation in the context of retirement planning.

Let’s take the case of 38-year-old Abhimanyu working in the private sector. He started his career 15 years back with a monthly salary of Rs 20,000.

Ever since he has received an average annual hike of 2% in basic pay. While his current monthly pay is Rs 75,000, his basic salary component is only about Rs 26,000. Like many private employers, he gets the bulk of his annual salary increment in the form of increases in allowances, bonuses and performance-linked incentives.

If Abhimanyu opts for a higher pension, two adjustments would happen. One, the EPFO would make retrospective adjustments  for the deficit in the 8.33% EPS contribution over the 15 years by way of a one-time debit from his EPF account and towards EPS.

In the first year, when Abhimanyu earned Rs 20,000 as basic salary, his monthly contribution to EPS was capped at Rs 1,250. And 8.33% of basic salary works out to Rs 1,666. So, Rs 416 (Rs 1,666 – 1250) of the employer’s contribution went diverted towards EPF every month. 

Thus, in the first year, the excess contribution towards EPF was about Rs 5,000 (Rs 416 X 12). Assuming an annual interest rate of 8.1% for 15 years, the amount to be debited from EPF for the first year contribution is Rs 16,083. Similarly, if calculated for all the 15 years of his service, EPF would require a total debit of Rs 2.07 lakh.

One needs to note that EPF earns interest on its balance (8.15% annually for 2022-23), while EPS contributions don’t earn any interest.

Now, there are two options for Abhimanyu. Either he continues with the existing scheme or opts for higher pensions.

Under the higher pension scheme, he will end with a pension of Rs 18,853.

If he doesn’t opt for a higher pension, then he needs to create better wealth than otherwise.

For one, if the EPF amount were not debited, and he worked till the age of 58, then his EPF portion (which got debited) would have earned about Rs 8.8 lakh on retirement.   It is based on the assumption of 7.5% annual interest rate on EPF investments.

Moreover, his (excess) contribution towards EPF would have resulted in an extra EPF kitty of Rs 8.07 lakh.

In all, he would have an extra kitty of Rs 16.9 lakh (Rs 8.8 lakh plus Rs 8.07 lakh) from which he would have to earn more than Rs 18,853. Assuming a post-retirement life of 20 years and another five years for his spouse, he would need to earn an annual return of 12.4% to stay away from higher pensions. Even by including equities in the portfolio, it might be a tad difficult.

So, clearly, in this case, a higher pension works out as a wiser option for Abhimanyu.

However, such choice-making depends on a number of factors:

Salary growth

A lot depends on the starting salary and its progression over the years.

If Abhimanyu had started his career with a basic salary of Rs 50,000 (and 2% annual basic hike), instead of Rs 20,000, things would have been different. That’s because his extra EPF would now total to about Rs 81 lakh while a higher pensionable salary would give Rs 47,132 as a monthly pension.

To earn that figure as a monthly pension, he needs to earn just 4.2% annually on his investments after retirement. By managing his EPF portfolio, he could potentially earn much more monthly salary than by way of higher pensions.

Hike in basic salary

One should not confuse the annual rate of increase in salary with that of its component ‘basic’. Many private employers keep the basic component of the salary deliberately lower – in the range of 30-40% of the Total Cost to the Company (CTC).

Only now, under the new wage code, companies have been mandated that the basic salary of their employees should not be less than 50% of the CTC. The basic salary of many employees has remained stagnant for years despite an average growth of 8% in their annual salaries.

If instead of a 2% annual growth in basic salary, it were to increase by a paltry 1%, Abhimanyu’s pension would have been lower by 23% at Rs 13,751.  However, he would still be better off with higher pensions since he would have a high watermark of 12.3% to earn annually on his investments.

Age of retirement

Abhimanyu probably has to benefit from retiring early. For instance, if he were to retire at 53 instead of 58, his pensionable monthly salary would be Rs 15,222 (19% lesser than usual) based on his 30 years of service. He would need to earn more than 16.7% annually from his ‘excess’ EPF contributions in order to not opt for higher pensions.

If Abhimanyu only had 10 years to compulsory retirement (or 48 years old now with basic salary of Rs 32,000) instead of 20 years, his monthly pension amount would remain the same (Rs 18,853).

With an EPF kitty of Rs 18.6 lakh, he would need to earn more than 11% annually to not opt for higher pensions. It seems the younger lot could benefit more from higher pensions, though there are a lot of other factors at work.


While for calculations, we have assumed a lifespan of 85 years, it’s quite likely that one may outlive their portfolio years. Higher pension in a way works out as a ‘safer’ option by assuring certain income till one’s death, though it is not adjusted for inflation.

On the other hand, a shorter lifespan could also prove detrimental and disallow the transfer of assets to near and dear ones after the death of the employee.

Personal finances

A lot also depends on one’s financial situation. If you already have a retirement plan in place and are contributing towards it, you may not need a higher pension. Or perhaps it could complement it by becoming the debt component of your asset allocation strategy.

Then, there are tax implications. While a monthly pension is taxable, a lump sum EPF amount given after retirement is exempt from tax. Someone seeking higher liquidity on retirement also might stay away from higher pensions.

Basic trends

For an Individual 15 years in service (38-year old) and Retiring at 58
Implicit IRR (in %) on Retirement
Starting Salary (In Rs)1% Annual Basic Salary Hike2% Annual Basic Salary Hike4% Annual Basic Salary Hike
Note 1. EPF interest rates are assumed to be 7.5% p.a. till retirement while past EPF rates are assumed to be 8.1% p.a.
Note 2. Retirement at 58 years and post-retirement lifespan of 20 years for the subscriber and another 5 years for the spouse

Higher annual basic salary hikes make higher pensions favourable (see table). Interestingly, it also helps those starting from a low base salary. Consider all the above-mentioned factors before signing the dotted line.


Individuals need to consider multiple factors before opting for higher pensions. Those with a robust retirement plan in place can also create higher pensions from their own portfolio and with a dash of equities. 

In case you wish to go ahead and opt for a higher pension, speak to your HR as you need to submit a declaration jointly with your employer to avail of this option. After you have the formal declaration, you will have to head over to the EPFO portal to complete the process.