The Hindu Business Line
How SC order on pension scheme alters your EPF plans
Clarity is awaited from EPFO post the apex court ruling
The Supreme Court recently dismissed a special leave petition filed by the Employees Provident Fund Organisation (EPFO) against a Kerala High Court judgment which in October, 2018 set aside the Employee’s Pension (Amendment) Scheme, 2014.
With the apex court upholding this judgment, the changes brought about by the scheme are no longer applicable.
This has significant implications for employees. Here’s how:
Under the Employees’ Provident Fund (EPF) scheme, a member gets a monthly pension for life from the Employees’ Pension Scheme (EPS), besides the provident fund corpus, on retirement.
The EPS account is primarily funded from employer’s contribution to the retirement corpus. Employers match employees’ contribution to the EPF. So, every month when 12 per cent of the Basic and Dearness Allowance (DA) components of your salary gets salted away to the EPF account, your employer makes an equal contribution.
While the deduction from your salary goes entirely to build the EPF corpus, a part of the employer’s contribution (8.33 per cent of the Basic and DA) goes towards your EPS account.
For calculations under the EPS, the Basic and DA amount was restricted to ₹6,500 a month until September 2014. So, from the employer’s contribution, the maximum amount that went to your EPS account each month was ₹541 (8.33 per cent of ₹6,500). The remaining went to the EPF.
From September 2014, after the Employee’s Pension (Amendment) Scheme, 2014, the Basic and DA amount was restricted to ₹15,000 a month.
So, from the employer’s contribution, the maximum amount that went to your EPS account each month was ₹1,250 (8.33 per cent of ₹15,000).
Unlike the EPF, your EPS balance does not earn interest. The pension you get is determined by the You are eligible for pension only after 10 years of service
number of years of pensionable service (effectively the number of years of contribution) and your pensionable salary.
The pensionable salary until September 2014 was the average Basic and DA in the last 12 months of service.
This was changed to the average Basic and DA in the last 60 months of service by the Employee’s Pension (Amendment) Scheme, 2014.
Also, there was a cap on the pensionable salary – ₹6,500 until September 2014 and ₹15,000 thereafter following the Employee's Pension (Amendment)
Scheme, 2014. The monthly pension is computed as (pensionable salary multiplied by pensionable service)/70.
You are eligible for pension only if you have served at least 10 years. Pension usually starts after the age of 58.
The pensionable service cannot exceed 35 years.
So, with a cap on pensionable salary of ₹6,500, the maximum pension you could have got was ₹3,250 a month — (35 multiplied by 6,500)/70.
With the increased cap on pensionable salary of ₹15,000, the maximum pension you could have got was ₹7,500 a month - (35 multiplied by 15,000)/70.
One of the major implications of the rulings by the Kerala High Court and the Supreme Court is that the cap on pensionable salary of ₹15,000 a month has been removed. So, you can choose to allocate a larger portion of the employer’s contribution to the EPS.
Say, your monthly Basic and DA is ₹30,000. Earlier, the allocation to the EPS was restricted to ₹1,250 (8.33 per cent of ₹15,000). Now, you can choose to increase the allocation up to ₹2,500 (8.33 per cent of ₹30,000).
The increase in pensionable salary, without a cap in the calculation formula, will also mean a higher payout for you after retirement.
But, with an increase in employer’s allocation to the EPS, the employer’s allocation to the EPF will reduce. After all, the employer’s overall contribution does not change – it remains at 12 per cent of Basic and DA.
So, there is a trade-off. Whether you should increase employer allocation to the EPS or continue with the current mix between the EPF and the EPS might need number-crunching.
Other factors, such as a lifelong pension versus a larger corpus at retirement, should also be considered.
Another key change after the Court rulings is that for pension calculation, pensionable salary will again be average Basic and DA in the last 12 months of service, and not average Basic and DA in the last 60 months. This will mean a higher pension payout .
According to the 2014 amendment, new employees with salary (Basic and DA) exceeding ₹15,000 per month were not eligible to become members of the EPS. But now, there is no such bar.
For those who have already retired, these key changes may allow for a higher amount of pension, if they choose to opt for a higher contribution to the EPS from past employer contributions to the EPF.
Clarity is awaited from the EPFO on the modalities of the process, if employees choose to opt for a higher contribution to EPS.