The Hindu Business Line

How SC order on pension scheme alters your EPF plans

Clarity is awaited from EPFO post the apex court ruling

- ANAND KALYANARAM­AN ISTOCK/JOYIMAGE

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With the apex court upholding this judgment, the changes brought about by the scheme are no longer applicable.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:

The basics

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.

What changed

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.

Clarity awaited

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.

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