All about the Central Government's game-changing EPFO pension update for private sector employees!

Eligible employees can increase their employer's EPS contribution for a higher pension amount payable upon retirement. This reduces the EPF corpus.

Higher pension or bigger provident fund balance
  • Private sector employees have the option to enhance their employer’s EPS contributions to benefit from higher pension payouts.
  • Enhanced EPS contributions would reduce EPF contributions, thereby creating a lower corpus.
  • While an enhanced EPS corpus can create a higher source of pension income, it has its drawbacks.
  • It is imperative to assess the pros and cons to make an informed decision.

In May 2023, the Central Government allowed private sector employees the option of opting for a higher pension under the Employees’ Pension Scheme (EPS), managed by the Employees' Provident Fund Organisation (EPFO). If opted, the employer’s contribution to the EPS scheme would be increased by an additional 1.16% every month. The total contribution would be calculated as the sum of the following:

  • 8.33% of the basic pay + Dearness Allowance + Retaining allowance
  • 1.16% of the basic pay + Dearness Allowance + Retaining allowance on the amount exceeding Rs. 15,000

As a result, the employer's monthly contribution of 12% would be split, with 9.49% directed to the EPS account and the rest allocated to the EPF (Employees' Provident Fund) account.

Also Read: Check your eligibility for a higher pension through EPS

Impact of the changed EPF-EPS mix

Choosing the higher EPFO pension option would impact your EPS and EPFO accounts in the following ways:

  • A major part of the employer’s contribution would be directed to the EPS scheme, increasing the EPS balance.
  • The allocation of a smaller portion of the employer's contribution to the EPF scheme would decrease the EPFO account balance.
  • Employees would stand to receive higher pension payments after retirement through an increased EPS account balance.
  • The total lump sum amount of EPFO for employees payable upon retirement or termination of services would be reduced.

Also Read: All you need to know about the Employee Pension Scheme

Things to know about changing the EPF-EPS mix

While you can stand to gain from higher pension payouts, here are some things to remember:

  • Pension incomes would be subject to taxation at your applicable income tax slab rates, while the EPF account balance remains free from tax upon termination or retirement.
  • Since the lump sum amount would be lower, it might impact the fulfilment of your financial goals. For instance, if you are looking to buy a house with your EPF balance, a lower payout would affect your purchase.
  • Eligible partial withdrawals from the EPF account would also decrease.

Your next steps

Before making a decision, it is important to evaluate your financial needs. If you are young, increasing the EPS contribution would significantly reduce your EPFO balance. However, if you aim for a larger lump sum amount upon retirement, this option may not be feasible.

On the contrary, if you prefer higher pension payments to meet rising expenses and ensure financial security for your family through family pension, increasing the EPS contribution would be more beneficial.

Therefore, carefully analyse your requirements, investment strategy, tax planning, and financial goals to make an informed decision.

Related: Learn more about partial EPF withdrawals for home loan repayment


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