Explainer: What is the new higher pension option
As the Employees’ Provident Fund Organisation (EPFO) has begun issuing demand notices of Rs 5 lakh to Rs 20 lakh or more for employees seeking higher pension under the Employees’ Pension Scheme (EPS), lakhs of individuals nearing retirement are asking the critical question — should you pay up or look elsewhere for smarter retirement options?
Fresh choice
In a landmark Supreme Court judgment (November 2022), employees who were Employees Provident Fund (EPF) members before September 1, 2014, and contributed on actual salary (above Rs 6,500 or Rs 15,000 statutory limits), were allowed to opt for higher pension based on full salary.
To qualify, employees must pay 8.33 per cent of the salary exceeding Rs 15,000 per month retrospectively — from their EPF start date or November 1995, whichever is later — along with interest.
What you lose
When you pay this retrospective lump sum amount, you lose the power of compounding on that money in your Provident Fund (PF).
Going forward, your employer’s contribution will go to the Employees’ Pension Scheme (EPS), not your PF. You also forgo future interest earnings on that diverted PF contribution. This could significantly reduce your PF retirement corpus, which otherwise grows tax-free, compounding over decades.
Plus and minus of it
Pros
Guaranteed monthly pension for life from age 58.
Spouse receives 50 per cent as family pension after your death. No market risk; fixed pension.
Cons
Huge upfront payment of Rs 5 lakh to Rs 20 lakh or even more if salary is high.
No inflation adjustment on pension.
No commutation or lump sum.
Formula is modest: Pension = (Average pensionable salary × service years) ÷ 70.
Example: With Rs 60,000 average salary and 30 years of service: (60,000 × 30) ÷ 70 = Rs 25,714/month. Even with Rs 10 lakh-Rs 20 lakh payment, your pension may not exceed Rs 30,000-35,000 per month unless your salary was very high.
Should you opt in
Consider it if:
You want predictable, low-risk income.
You lack any other retirement income stream.
Avoid it if:
You prefer flexibility, inflation-beating returns.
You understand market instruments and can take moderate risk.
You’d rather retain control over your retirement funds.
Retirement options
If you skip the higher EPS pension, here are diversified options:
Senior Citizen Savings Scheme (SCSS)
Interest: 8.2% (as of April 2025)
Maximum investment: Rs 30 lakh per individual
Payout: Rs 20,000/month
Government-backed and safe
RBI floating rate savings bonds
Interest: 8.05% (linked to NSC)
Lock-in: 7 years
Ideal for risk-averse, fixed income seekers
Life insurance plans
One-time premium = monthly pension for life
Joint annuity options for spouse included
Mutual fund SWPs (Systematic Withdrawal Plans)
Invest lump sum in balanced and equity savings funds
Withdraw Rs 50,000/month
Returns: 10-12% per annum (moderate risk)
Tax-efficient if held long-term
National Pension System
Post-retirement: Part lump sum + part annuity
Returns: 8-10% post-tax over the long term
Ideal for those with time to build corpus
To earn Rs 50,000/month (Rs 6 lakh/year) at 8% return, you need a corpus of Rs 75 lakh
Decide wisely
Opting for higher EPS pension is a one-way street. Once you commit, there’s no going back. You’re locked into a fixed-income product that doesn’t beat inflation or offer flexibility. Evaluate your financial goals, check your eligibility and pension estimate, consider opportunity costs and alternative returns, and consult a financial planner before deciding.
Deadline alert
May 31, 2025, is the final date to make the payment if you’re opting in.
India