How Is Pension Calculated In India?

In India, pension is a regular payment made to individuals after retirement from employment, typically aimed at providing financial security in the post-retirement phase. The way pension is calculated depends on the type of pension scheme a person is enrolled in, which can vary across government and private sectors. Pension calculation involves several factors such as length of service, average salary, and the specific rules of the pension scheme.

Types of Pension Schemes in India:

Government Pension Schemes:

These are pensions provided to employees of the central and state governments.

• Examples include the Central Civil Services (Pension) Rules, Contributory Pension Scheme (CPS), and National Pension Scheme (NPS).

Private Pension Schemes:

These are pensions provided by private employers to their employees or by individuals under personal retirement plans such as those offered by insurance companies or mutual funds.

Government Pension Calculation:

For Civil Services Employees:

In India, government pension is typically calculated based on the Last Drawn Salary and the Length of Service.

Pension Formula:

Government pension is generally calculated as 50% of the last drawn salary, and the employee must have at least 10 years of service to qualify for pension benefits.

• Basic Pension = 50% of Last Drawn Salary.

Dearness Allowance (DA): The dearness allowance, which is a percentage of the basic salary, is added to the pension. It is revised periodically based on inflation rates.

Example:

If the last drawn basic salary of an employee is ₹60,000, the pension would be 50% of ₹60,000, which equals ₹30,000.

If the dearness allowance is 10%, the pension will be ₹30,000 + ₹3,000 = ₹33,000.

For Military Personnel (Defence Services):

The pension for military personnel is generally higher due to the Military Service Pay (MSP) and various other allowances.

Similar to civil services, it is calculated based on the Last Drawn Pay and Length of Service, but with additional benefits, such as pensions for their families.

For Employees Under Contributory Pension Scheme (CPS):

CPS is applicable to employees joining government services after 2004. It is a defined contribution scheme, where both the employee and employer contribute to the pension corpus.

The final pension amount depends on the corpus accumulated through contributions and the returns generated over time.

Private Sector Pension Calculation:

Provident Fund (PF) + Gratuity + Pension:

Private sector employees typically receive a Provident Fund (PF) and may also be entitled to a pension through their employer’s pension scheme or by purchasing an individual pension plan.

Pension Under PF Scheme: In some cases, a portion of the EPF (Employee Provident Fund) can be used to generate a monthly pension after retirement, but this is applicable only if the employer contributes to the pension fund.

National Pension Scheme (NPS):

The National Pension Scheme (NPS) is available for both government and private employees. NPS is a defined contribution scheme, meaning the amount of pension depends on how much is contributed during the working years.

Calculation under NPS:

At retirement, the individual can withdraw 60% of the accumulated corpus as a lump sum, and the remaining 40% is used to purchase an annuity, which provides a monthly pension.

Example:

If the corpus accumulated in NPS is ₹50 lakh, the individual can withdraw ₹30 lakh (60%) as a lump sum, and the remaining ₹20 lakh (40%) would be used to buy an annuity, which provides a monthly pension based on the terms of the annuity plan chosen.

Key Factors Affecting Pension Calculation:

Length of Service:

For government employees, the length of service directly impacts the pension amount. Typically, a person with more than 10 years of service is eligible for pension benefits.

Last Drawn Salary:

A higher salary at the time of retirement usually results in a higher pension. The pension is calculated as a percentage of the last drawn salary.

Pensionable Salary:

In some schemes, pension is based on the pensionable salary, which may exclude certain allowances, bonuses, and other benefits.

Pensionable Service:

The number of years a person has worked determines the pensionable service, and thus, the overall pension amount. In most cases, more years of service result in a higher pension.

Annuity Rates (for NPS and Private Pension Plans):

In schemes like NPS, a portion of the corpus is used to purchase an annuity. The monthly pension amount will depend on the annuity provider’s rates, which vary depending on the individual’s age and other factors.

Government and Employer Contributions:

For NPS, the contributions from both the employee and employer play a vital role in determining the final corpus and, consequently, the pension.

Example Calculation of Pension:

Scenario 1: Government Employee (Civil Services)

• Last Drawn Basic Salary: ₹60,000
• Length of Service: 30 years

Pension Calculation:

• Basic Pension = 50% of ₹60,000 = ₹30,000
• Dearness Allowance (DA) @ 10% = ₹3,000
• Total Monthly Pension = ₹30,000 + ₹3,000 = ₹33,000

Scenario 2: Private Employee (Under NPS)

• Accumulated NPS Corpus at Retirement: ₹50 lakh
• Withdrawal from NPS: 60% of ₹50 lakh = ₹30 lakh (lump sum)
• Amount Used for Annuity: 40% of ₹50 lakh = ₹20 lakh

Based on the annuity rates, this ₹20 lakh may provide a monthly pension, say ₹15,000, depending on the annuity plan chosen.

Conclusion:

The calculation of pension in India depends on various factors, including the type of pension scheme, the individual's salary, length of service, and contributions made over time. For government employees, pension is calculated as a percentage of the last drawn salary, with additional benefits like dearness allowance. For employees in the private sector, pension can come from schemes like NPS, which is based on contributions and the annuity purchased at retirement. Understanding the various rules and factors involved is essential for accurate pension planning and ensuring financial security after retirement.