This is how EPFO's calculator calculates pension on pro-rata basis

Under the old EPS pension scheme, basic salary cap is taken to be Rs 6,500 until Aug 31, 2014 and Rs 15,000 thereafter

A reader named K K Kulshrestha recently pointed out that the calculations being shown in some media reports for the pension that will be paid out by the Employee Pension Scheme (EPS) are on the higher side. In reality, he says, the pension that will be paid out will be lower, as demonstrated by the pension calculator on the Employees’ Provident Fund Organisation’s (PFO) website. Let us examine if his contention is indeed true.

Let us explain this issue with the help of an example. Suppose that Mr A (born on April 1, 1972) begins working on April 1, 2000. He will retire on March 31, 2030. His basic salary at the time of joining was Rs 15,000.

As you are aware, the pension is calculated as follows:

= Pensionable salary X Pensionable service/70

Most people calculate the pension as follows:

= 15,000 X 30/70 = Rs 6,428.57.

Here the assumption is that the basic salary would be higher than Rs 15,000 over the final five years of his career. Under the old scheme, the basic salary is capped at Rs 15,000.

Pension calculator’s output

When the same numbers are fed into the pension calculator, the pension comes out to be a lower amount of Rs 4,679. Why does this discrepancy exist?

“Until August 31, 2014, the basic salary was capped at Rs 6,500. It is from September 1, 2014 that the basic salary cap was raised to Rs 15,000. It appears that the EPFO calculator takes a weighted average of the salary cap,” says Deepesh Raghaw, a Sebi-registered investment advisor (RIA) and the founder of PersonalFinancePlan.

Between April 1, 2000 and August 31, 2014, there are 5,265 days. The basic salary cap was Rs 6,500 during this period. Between September 1, 2014 and March 31, 2030 (Mr A’s date of retirement), there are 5,691 days. The basic salary cap is Rs 15,000 for this period.  

The weighted average of basic salary becomes:

(5,265 X 6,500) + (5,691 X 15,000)/(5,265 + 5,691)

= Rs 10,915

Now applying this basic salary to the pension formula, the pension comes to:

= (10,915 X 30)/70 = 4,679.

The master document for the EPS Amendment of 2014 also says: “Provided that the members’ monthly pension shall be determined on a pro-rata basis for the pensionable service up to September 1, 2014 at the maximum pensionable salary of Rs 6,500 per month and for the period thereafter at the maximum pensionable salary of Rs 15,000 per month.”

All this won’t apply if you opt for the higher pension scheme under EPS.