Usually, employees covered under the Employees Pension Scheme (EPS) know that they are eligible for a pension from the age of retirement. However, not many know that if they have been covered under the Employee’s Provident Fund (EPF) for more than 20 years, they are also entitled to a bonus. This bonus is given in the form of additional service years as specified under the pension scheme. Once this bonus is added to your service year, then this will boost the pension amount you are eligible to Receive.
Mallika Noorani, Senior Partner, Parinam Law Associates, says, “If an employee has rendered service of 20 years or more under the EPF Scheme, then two years is added to the service period. This service period can be with one employer or with different employers, provided they are covered under the EPF Scheme. Do note that the maximum service period under the EPS is 35 years.”
She explains this with an example. Suppose an individual has worked for 20 years while being covered under the EPF Scheme. When the pension of the individual is calculated, two years will be added to the pensionable service period. This means that it will be assumed that the individual has worked for 22 years for the purpose of EPS pension calculation. However, if the employee’s service period is 35 years, then there will be no addition to the service years as bonus.
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How bonus years impact Your EPS pension amount?
An employee eligible for bonus will receive a higher pension amount if the bonus service years are added to their service.
This is done by doing calculation (Pensionable salary X pensionable service years)/70.
Let us take the case of an employee who has worked for 21 years with multiple employers while continuously making contributions to the EPF and EPS accounts. The pensionable salary is capped at Rs 15,000, according to the EPF law. The eligible pension amount would be Rs 4,500 – (15,000X21)/70. Now, if the bonus service years (2 years) are added to the pensionable service years, the pension amount would become Rs 4,929 – Rs (15,000X23)/70.
How the EPS pension is determined?
The statute governing the EPF specifies the following formula: (Pensionable Salary X Pensionable Service Years)/70.
The “average” of the most recent drawn salary is the pensionable wage. It is the average of the basic wage for the previous 60 months, according to the EPFO’s 2014 announcement (which was upheld by the Supreme Court in its decision dated November 4, 2022). From September 1, 2014, the average pay was restricted to Rs 15,000 per month.
The number of years during which the employer made EPS contributions is referred to as pensionable service. According to Noorani, “Employees should remember that such years will not be taken into account for pension calculation if there is a gap in the EPS contributions over the working life of an employee”.
Assume, for example, that a worker has worked for company A (which is EPF-covered) for five years, company B (which is EPF-covered) for six years, and firm C (which is not EPF-covered) for four years. Only the service periods for businesses A and B will be taken into account for calculating the pension. This is due to the fact that whilst the individual was employed by firm C, no contributions were made to the EPF and EPS account.
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