Confused About EPS Contributions for New Employees Earning Over Rs. 15,000? Let's Discuss

I have a doubt about this matter. Please clarify this.

Those who started a job after 1st September 2014 and are earning more than Rs. 15,000 in basic and DA will not be contributing to the EPS or Pension scheme.

Enclosed, please find the notification for your clarification.

Thank you.

EPF Interest Calculation

EPF interest is calculated on the contributions made by both the employee and the employer. The contribution made by the employee equals 12% of their Basic Pay plus Dearness Allowance (DA). When the Basic Pay plus DA is less than or equal to Rs 15,000, the employee contribution is 12% of Basic Pay + DA, whereas the employer contribution is 3.67% of the Basic Pay + DA.

Methods of Computing Contributions

There are three methods of computing the contributions if the income is above the threshold of Rs 15,000:
1. Employee contribution
- 12% of basic pay plus DA
- 12% of Basic pay - 8.33% of 15,000
- 12% of basic pay plus DA, 3.67% of 15,000
- 12% of 15,000, 3.67% of 15,000

We have used the first method for computing the employee and the employer contribution. To understand our methodology, let us consider the following case:
1. Employee's Basic Pay + DA: Rs 25,000
2. Employee contribution towards EPF: 12% of 25,000 = Rs 3,000
3. Employer contribution towards EPF: 3.67% of 25,000 = Rs 917.50
4. Employer contribution in Employee Pension Scheme (EPS): Rs 2,082.50
5. Excess contribution of employer towards EPS above the threshold: Rs 832.50
6. The excess amount in (B) is added to the employer contribution towards EPF in (A) = Rs 1,750

Hence, the final employer contribution towards EPF will be Rs 1,750. Both methods produce the same result.

Interest Calculation on Contributions

Once the contribution of the employee and the employer is computed, we calculate the interest on the contribution. The interest is calculated on the opening balance of each month. As the opening balance for the first month is zero, the interest earned in the first month is zero.

For the second month, interest is computed on the closing balance of the first month, which is the same as the opening balance of the second month. The closing balance of the first month is calculated by adding the employee's and the employer's contribution for the first month.

Similarly, the interest on the third month is computed on the closing balance of the second month. The closing balance of the second month is calculated by adding the closing balance of the first month and the employee as well.

The total EPF balance at the end of the year = Balance at the end of 12 months (Employee plus the Employer contribution) + Sum of the interest earned in each month in the year = Rs 59,351.

Withdrawal Conditions

Regarding withdrawal, one can withdraw the full EPF balance upon attaining the age of 58 years. However, 90% of the EPF corpus can be withdrawn upon reaching the age of 57 years.

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Our organization pays PF contribution, which is called CPF, on the ceiling of Rs 15,000/-. So, Rs 1,800/- + Rs 1,800/- from the Employer (from which 8.33% goes to the pension fund) is deposited to EPFO. It is assumed that after retirement, employees who receive a last salary, say Rs 50,000/-, will get a very small pension amount. As a self-financed organization, it is not expected that Management will agree to higher contributions to the CPF. Therefore, the ceiling will remain at Rs 15,000/-.

My question is:

(a) Can an employee deposit a higher share amount (say Rs 10,000/-) monthly even if the Employer pays only Rs 1,800/- (within the ceiling of Rs 15,000/-) to the pension fund?

(b) If an employee retires, can they deposit the required amount to EPFO to receive a higher pension (say 50% of the last pay drawn)?