Clipped from: https://www.thehindubusinessline.com/blexplainer/epfos-higher-pension-scheme-whats-in-it-for-you/article66537603.ece
Opting for higher pension comes with a trade-off — a lower lumpsum payout to you at retirement
To be eligible for pension at full pay, employees should still be contributing to EPF and their employer should have made EPF contributions on their full pay so far | Photo Credit: Jasmine Nongrum
What was the Supreme Court ruling on the Employee Pension Scheme (EPS) all about?
As an employee, you’d know that 12 per cent of your basic pay (plus permanent components such as DA) is deducted every month towards a contribution to the Employees Provident Fund or EPF. This is matched by your employer, an annual interest is declared, and a lumpsum is paid to you at retirement. While your 12 per cent contribution goes entirely into your EPF account, 8.33 per cent of the employer’s contribution, in some cases, goes into the Employee’s Pension Scheme or EPS, a separate scheme for guaranteed pension payouts after retirement.
On September 1, 2014, the government brought in some amendments. It said that the EPS contribution of 8.33 per cent would be calculated on a maximum salary of ₹15,000. Until then, the salary cap was ₹6,500, but employers could make higher contributions based on actual pay. It also said that employees earning over ₹15,000/month and joining after September 1, 2014, could no longer avail of EPS. Employees unions, finding these changes unpalatable, filed cases against the EPFO in High Courts and won. The EPFO appealed in the Supreme Court (SC), which passed its final ruling in November 2022.
What did the SC say?
The SC ruling said the Centre had a right to restrict EPS benefits only to employees earning up to ₹15,000/month, from September 1, 2014. But it also held older employees who had been members of the EPF before September 1, 2014, and were still working, should be given a chance to opt for pension at their full pay. The EPFO was asked to give such employees a four-month window from the date of the SC ruling to avail of this benefit. This deadline expires on March 3, 2023.
What has EPFO done about this?
The EPFO has issued two circulars to implement the SC ruling. The December 2022 circular was not clear. The new circular issued on February 20, 2023, lays down this procedure. It says that employees who were members of EPF before September 1, 2014, can apply for pension at full pay now. But to be eligible, they should still be contributing to EPF and their employer should have made EPF contributions on their full pay so far. They will need to submit a joint option form with their employer to the regional EPF office for higher pension. They also need to consent to allow their past employer’s contributions (at 8.33 per cent of full pay) to be diverted from their EPF account to the government’s EPS kitty. You need to submit this via your HR department by March 3 2023.
What does this mean for me?
This circular is relevant to you only if you have enrolled in the EPF before September 1, 2014, and are still working. Currently, your pension after retirement will be calculated based the formula: Pensionable salary x pensionable service/70. Your pensionable salary in the above formula would have been capped at ₹15,000/month. But if you now opt for a higher pension based on your actual pay (basic plus permanent components), the pensionable salary in the above formula will be much higher. This can give you a higher government-guaranteed pension after retirement. But do note that opting for higher pension comes with a trade-off. It will mean part of your EPF balances accumulated so far with interest will be permanently transferred to the Centre’s EPS kitty. This will mean a lower lumpsum payout to you at retirement.
Read also: Everything you need to know about the new EPFO guidelines