EPS-95 Pension Formula: The 2024 Supreme Court Position on Higher Pension Option

Many salaried Indians retiring in 2026 are discovering an uncomfortable truth: the monthly Employees' Pension Scheme (EPS-95) cheque arriving from the Employees' Provident Fund Organisation (EPFO) is far smaller than they expected. After 30 years of service, a typical default pension lands between Rs 5,000 and Rs 7,500 per month. The Supreme Court's 4 November 2022 judgment in Employees Provident Fund Organisation v. Sunil Kumar B (Civil Appeal Nos. 8143-8144 of 2022) reopened the long-shut window for employees to opt for "higher pension" calculated on actual salary rather than the statutory ceiling of Rs 15,000. As of May 2026, the dust from that ruling has still not fully settled.

This article walks through how EPS-95 calculates pension under the default formula and the higher-pension option that survived the Supreme Court's intervention. We then work a multi-decade drawdown comparison so retirees can decide whether the higher-pension route, which requires a one-time payment of past dues plus interest, makes financial sense versus alternatives like the Senior Citizens Savings Scheme at 8.20 percent (Q1 FY 2025-26 quarterly rate).

The Scheme Explained

EPS-95 was notified on 16 November 1995 under Section 6A of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952. It diverted a slice of the employer's 12 percent provident fund contribution into a defined-benefit pool that pays a monthly pension after retirement. Of the employer's 12 percent of basic salary plus dearness allowance, 8.33 percent flows to EPS while the remaining 3.67 percent goes to the Employees' Provident Fund (EPF). The employee's full 12 percent stays in EPF, which earns 8.25 percent for FY 2024-25 per the EPFO Central Board of Trustees declaration of February 2024.

The pension formula prescribed in Paragraph 12 of the EPS-95 scheme is deceptively simple:

Monthly pension = (Pensionable salary x Pensionable service) / 70

Pensionable salary is the average monthly basic plus dearness allowance over the last 60 months of service before retirement, after the EPFO amendment notified on 22 August 2014. Pensionable service is the number of completed years of contribution, plus a 2-year bonus for members with at least 20 years of service. The denominator 70 represents the actuarial divisor selected by the scheme's framers in 1995.

The catch is the salary cap. From 1 September 2014, EPFO amended Paragraph 11(3) to limit pensionable salary to Rs 15,000 per month, raised from the earlier Rs 6,500 ceiling. For an employee with 35 years of service whose actual basic plus DA is Rs 1,00,000 per month, the default EPS pension is computed on the Rs 15,000 ceiling, yielding (Rs 15,000 x 35) / 70 = Rs 7,500 per month. The same formula applied to actual salary would yield (Rs 1,00,000 x 35) / 70 = Rs 50,000 per month. That gap, a 6.7x difference for the same career, is the pressure point the Supreme Court addressed in Sunil Kumar.

The November 2022 judgment upheld the 1 September 2014 cut-off but allowed employees who were members on 1 September 2014 and continued thereafter a fresh window to exercise the higher-pension option originally available under the pre-amendment proviso to Paragraph 11(3). EPFO operationalised the directive through Circular No. Pension/2022/54877/15149 dated 29 December 2022 and a follow-up clarification on 20 February 2023, with the final extended deadline for joint applications closing on 11 July 2023.

The cost of opting in is non-trivial. The employee must agree to a "diversion plus interest" arrangement: 8.33 percent of the actual salary above Rs 15,000 retroactively flows from the EPF account to EPS for every month from 1 September 2014 (or the date of joining, if later) up to retirement, with EPFO interest applied on the diverted sum. EPFO Circular No. Pension-1/12/33/EPS Amendment/96/Vol.II dated 23 May 2023 sets out the demand-cum-receipt computation methodology.

For a granular contribution breakdown, the EPF calculator lets you separate the EPF and EPS components on any salary level. Members contemplating the higher-pension option should also study the EPS glossary entry, which explains the survivor pension and disability benefits that travel with the EPS corpus.

Tax on Withdrawal

Unlike the EPF lump sum, which enjoys exemption under Section 10(12) of the Income-tax Act, 1961 if withdrawn after five years of continuous service, EPS pension is fully taxable as "income from salary" under Section 17(1)(ii). This applies in both the old and the new tax regime in FY 2025-26.

A retired EPS pensioner over 60 in FY 2025-26 paying tax under the new regime is entitled to:

• The standard deduction of Rs 75,000 from pension income, enhanced by Finance (No. 2) Act 2024
• The basic exemption of Rs 4,00,000 under the revamped slabs introduced by Finance Act 2025
• Rebate under Section 87A up to Rs 60,000 if total income does not exceed Rs 12,00,000

A retiree drawing Rs 50,000 per month from the higher-pension route has Rs 6,00,000 annual pension. After the Rs 75,000 standard deduction, taxable income is Rs 5,25,000, well within the Rs 12,00,000 rebate threshold, so tax payable is nil. A retiree drawing Rs 7,500 per month under the default formula has annual pension of Rs 90,000, also nil tax, but the difference is Rs 5,10,000 per year of fully tax-free additional pension under current FY 2025-26 thresholds.

Note that Section 80CCD(1B), the popular Rs 50,000 NPS additional deduction, is not allowed in the new regime in FY 2025-26 and is available only under the old regime, a critical detail for retirees deciding which regime to elect. EPS pension itself does not qualify for any 80C-style deduction because it is treated as salary in the year of receipt, not as an investment in the year of contribution.

EPFO does not deduct TDS on EPS monthly pension if the aggregate income is below the basic exemption limit, but pensioners must furnish Form 15H (or 15G if under 60) annually to avoid TDS at higher pension levels. The legal basis is Section 197A of the Income-tax Act read with CBDT Circular No. 6/2017 dated 24 January 2017.

The Rs 20 lakh gratuity ceiling has not been revised since 29 March 2018 despite repeated representations to the Ministry of Labour and Employment. Cross-reference our explainer on the Rs 20 lakh gratuity cap for the litigation history and why most online calculators still show Rs 25 lakh incorrectly.

Worked Drawdown: Default vs Higher Pension Over 25 Years

Consider Anjali, a Bengaluru engineering manager born in 1968 who retires on 30 April 2026 at age 58. Her contribution history reads:

• Joined EPS on 1 June 1996, completing 29 years 11 months of contributory service
• Pensionable service is rounded to 30 years inclusive of the 2-year bonus for service exceeding 20 years
• Final 60-month average basic plus DA of Rs 1,20,000 per month
• Was a member on 1 September 2014 and submitted a joint higher-pension application on 26 June 2023, well within the 11 July 2023 deadline

Scenario A - Default pension on Rs 15,000 ceiling

• Pensionable salary: Rs 15,000
• Pensionable service: 30 years
• Monthly pension = (15,000 x 30) / 70 = Rs 6,428

Scenario B - Higher pension on actual salary

• Pensionable salary: Rs 1,20,000
• Pensionable service: 30 years
• Monthly pension = (1,20,000 x 30) / 70 = Rs 51,428

The arithmetic gap is approximately Rs 45,000 per month, or Rs 5.40 lakh per annum, before any inflation adjustment. Crucially, EPS-95 pension does not have a built-in indexation mechanism, the pension stays fixed in nominal terms for life unless the Government of India announces a formula revision, which it has not done since the November 1995 launch.

Anjali also pays past dues. Her higher-salary contribution differential averaged Rs 8,750 per month over 30 years equates to Rs 31.5 lakh of base diversion, plus EPFO compounding interest at the prevailing year-by-year rate (which has averaged around 8.50 percent across 2014-2025) takes the total demand to roughly Rs 60-65 lakh, debited from her EPF balance per the May 2023 EPFO circular.

To translate the choice into a comparable lifetime number, we work a 25-year drawdown assuming Anjali lives until age 83, the average life expectancy at age 60 for Indian women per the Sample Registration System Abridged Life Tables 2017-2021 published by the Office of the Registrar General of India in August 2024.

Even after deducting the Rs 60-65 lakh upfront cost of opting in, Anjali's lifetime advantage from the higher-pension route is roughly Rs 70-75 lakh in undiscounted rupees over 25 years. Once the Section 87A rebate of Rs 60,000 and Rs 75,000 standard deduction are applied, the entire pension stream falls below the Rs 12 lakh new-regime rebate threshold, so the math clearly favours opting in.

The picture changes once you discount future cashflows. At a 6 percent discount rate, the present value of Rs 5.40 lakh annually for 25 years is approximately Rs 69 lakh, almost exactly equal to the upfront cost. At a 5 percent discount rate, the present value rises to Rs 76 lakh and the higher-pension option breaks even faster. A retiree who outlives 83, increasingly common given India's steadily improving life expectancy data published by the Sample Registration System, ends up clearly ahead.

For interactive scenario modelling against an NPS or systematic-withdrawal alternative, our annuity vs SWP calculator lets you compare a fixed pension stream against a market-linked withdrawal plan. Pair it with the retirement drawdown calculator to stress-test against an inflation rate of 6 percent and your chosen equity allocation.

The flip side: a member with only 10-15 years of service post-2014 sees a smaller absolute gain because the pensionable-service multiplier is small. For employees whose actual salary exceeds Rs 15,000 by only 30-40 percent, the demand-plus-interest cost can exceed the lifetime pension differential. EPFO's member portal (member.epfindia.gov.in) supplies an exact rupee figure once the option is exercised.

A final wrinkle: through 2025 the Kerala High Court directed EPFO to process pending higher-pension applications expeditiously, and similar litigation continues in the Bombay and Madras High Courts as of early 2026. Members with unfinalised applications should study the defined-benefit pension primer to understand their statutory entitlements.

FAQ

Is the higher-pension option still open in 2026?

The application deadline closed on 11 July 2023 per EPFO Circular No. Pension/2023/Higher Pension/Application/22326 dated 26 June 2023. Pending applications submitted before that date continue to be processed by EPFO field offices. No fresh window has been opened by EPFO or directed by the Supreme Court as of May 2026, despite repeated representations from EPS-95 pensioner federations.

Does EPS-95 pension increase with inflation?

No. The pension is fixed in nominal terms at retirement and remains unchanged for life. The Government of India has not notified any indexation mechanism since the scheme was framed on 16 November 1995, despite recommendations from the EPS Pension Committee constituted in 2018. Pensioners therefore lose purchasing power at roughly 6 percent per year on the Consumer Price Index for Industrial Workers basis, the inflation index typically cited by the Labour Bureau.

What happens to EPS pension after the pensioner's death?

A widow or widower receives 50 percent of the original pension (subject to a minimum of Rs 1,000 per month) for life. Up to two children below 25 receive 25 percent each as orphan pension under Paragraph 16(2) of the EPS-95 scheme. If both parents are deceased, the children's share rises to 75 percent under Paragraph 16(3), with the cumulative payout to children capped at the original member's pension amount.

Can I withdraw EPS as a lump sum instead of taking pension?

Yes, if your contributory service is less than 10 years, you can claim the EPS contributions as "withdrawal benefit" using Form 10C. Service exceeding 10 years locks the corpus into the monthly pension stream, there is no lump-sum option for long-service members. The minimum age for pension commencement is 50 with a reduction factor of 4 percent per year for early commencement, or 58 without any reduction.

How is EPS-95 pension different from NPS?

EPS-95 is a defined-benefit pension where the formula is statutorily fixed and EPFO carries the long-term funding risk. The National Pension System is a defined-contribution scheme regulated by PFRDA under the PFRDA Act, 2013, where the corpus depends entirely on market returns of your chosen asset allocation between equity, corporate debt, and government bonds. NPS at retirement requires a minimum 40 percent annuity purchase under the PFRDA (Exits and Withdrawals) Regulations, 2015, see our NPS calculator for projections under both schemes.

Does the Rs 1,000 minimum pension still apply?

Yes. The Government of India introduced a minimum monthly EPS pension of Rs 1,000 in September 2014 as a one-time relief measure. Long-pending demands to raise this floor to Rs 7,500, repeatedly tabled by EPS-95 pensioner federations including the EPS-95 National Agitation Committee, have not been accepted by the Ministry of Labour and Employment as of the FY 2026-27 Union Budget tabled on 1 February 2026.

Is EPS pension taxed at slab rates or as long-term capital gains?

Slab rates. EPS pension is treated as salary income under Section 17(1)(ii) of the Income-tax Act 1961, taxed at the slab rate applicable for the financial year of receipt. The capital-gains rates of 12.5 percent (long-term) or 20 percent (short-term) introduced by Budget 2024 for listed equity apply only to capital assets, not to pensions or any other salary-class income.