Higher Pension Scheme by EPFO : Last date, benefits eligibility

Higher Pension Scheme

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. Calculation of EPS contribution of 8.33 per cent on a maximum salary of Rs 15,000. Until then, the salary cap was Rs 6,500, but employers could make higher contributions based on actual pay. It was also said that employees earning over Rs 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.

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What did the SC on higher pension scheme say?

The SC ruling said the Centre had a right to restrict EPS benefits only to employees earning up to Rs 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.

Read Also: EPFO – 17 FAQ’S on transfer of EPF Accounts

What does this mean for you?

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 Rs 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 pay-out to you at retirement.

Summary of SC judgement on Higher Pension Scheme

Status of EmployeeExercise of joint option Eligibility to claim 8.33% pension contribution on a higher salaryMode of higher pension claim
Employees in service as on 01/09/2014 Exercised joint option and rejected by the EPFO Yes By filing a higher pension claim application
Employees in service as on 01/09/2014 Not exercised joint option but contributing to EPS above the cap of Rs.5,000/Rs,6,500YesBy exercising the joint option within four months of the judgement date, i.e. within 03/03/2023
Employees retired before 01/09/2014Exercised joint option and rejected by the EPFOYesBy filing a joint option and higher pension claim application
Employees retired before 01/09/2014Not exercised joint option NoNot applicable

Read Also: PPF vs EPF : Difference between EPF and PPF

Should you submit application for higher pension under EPS by 3 March 2023?

The deadline for individuals to submit an application for a higher pension under the Employees’ Pension Scheme (EPS) is 3 March 2023. The Employees’ Provident Fund Organization (EPFO) members as of September 1, 2014 would now be allowed to choose a higher pension based on their actual basic wages. This guideline has been announced by EPFO for old members to apply for higher pension and make higher contributions towards EPS at 8.33 percent instead of the maximum ceiling of Rs 15,000 pensionable salary per month. For deciding your application for higher pension under EPS, lets have a look on key factors to consider before option higher pension.

Read Also: Everything about EPF Registration for Employer

Factors to consider on higher pension as a member EPFO

The decision to opt for a higher pension as a member of the EPFO ultimately depends on your personal financial situation and retirement goals. Here are some factors to consider:

Eligibility: To be eligible for a higher pension, you must have been a member of the Employees’ Pension Scheme (EPS) for at least 10 years and have reached the age of 50 or 58 years (depending on when you joined the EPS).

Cost: Opting for a higher pension requires you to contribute more to the EPS. You can choose to contribute up to 8.33% of your salary to the EPS, but the employer contribution is limited to 8.33% of Rs 15,000 per month (i.e., Rs 1,250 per month). So, if your salary is more than Rs 15,000 per month, you will have to make an additional voluntary contribution to the EPS to get a higher pension.

Read Also: EPF: Online EPF account transfer process

Benefits: A higher pension will provide you with a larger monthly income during your retirement years, which can be especially beneficial if you do not have other sources of retirement income. However, it is important to note that the EPS pension is a defined benefit plan. In other words the amount of your pension is predetermined based on your years of service and average salary, and is not subject to market fluctuations.

Long-term planning: You should consider your long-term retirement goals when deciding whether to opt for a higher pension. If you have other sources of retirement income (such as a personal pension or investments), you may not need a higher EPS pension. However, if you do not have other sources of retirement income, a higher EPS pension may be beneficial. The decision to opt for a higher EPS pension depends on your personal financial situation and retirement goals. You should carefully consider the costs and benefits before making a decision. It may be helpful to consult with a financial advisor to help you make an informed decision.

EPS and EPF contribution

Currently the employees and the employer contribute 12% of their basic salary and dearness allowance to their EPF account. Of the employers 12% contribution 8.33% goes to Employee Pension Scheme and 3.67% to EPF. However, this 8.33% EPS contribution is capped at maximum amount of Rs 15000/- even when the employee draws a higher salary.

For Example:

Mr. ‘X’ became a member of the EPF in 1998. He has not exercised the joint option. His salary increased to Rs.50,000 in 2015. His employer contributes Rs.6,000 (i.e. 12% of his basic wage) towards EPF. Of the employer’s contribution, Rs.1,250 (i.e. 8.33% of Rs.15,000; the statutory wage cap) will go to the EPS. The remaining Rs.4,750 (i.e. Rs.6,000 – Rs.1,250) will go to the EPF.

He exercises the joint option within 03/03/2023 as per the Supreme Court judgement since the EPS contribution is above the statutory wage cap of Rs.6,500.

After submitting the joint option, his employer will contribute Rs.4,165 (i.e. 8.33% of Rs.50,000; his actual salary) and Rs.1,835 (Rs.6,000 – Rs.4,165) towards EPF. The EPFO will calculate the monthly EPS amount of 8.33% of the actual salary and transfer the difference amount from the EPF to the EPS.

In such cases, the EPFO will return to the joining date or 01/11/1995, whichever is later, and transfer the difference from the PF account to the EPS account. But, the higher pension contribution will reduce the EPF lumpsum corpus that the employee gets upon retirement.

Higher Pension Scheme – Good or bad?

It benefits individuals who want a higher monthly pension but do not require a huge lump sum upon retirement. The higher pension contribution will increase the monthly pension amount but reduce the EPF lump sum given to employees upon retirement. Thus, individuals who have other investments and will receive a lump sum upon its maturity can opt for the higher pension scheme. However monthly pension is taxable, but lumpsum EPF amount given after retirement is tax exempted.

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