EPFO members now eligible for higher pension: Should you opt for it?

All salaried employees get provident fund and pension benefits, under the two schemes. These are Employees’ Provident Fund and the Employee Pension Scheme); both governed by EPFO.

If you were a salaried employee as of September 1, 2014, there are chances that your employer would have sent you an email opting to get a higher pension (after retirement) under the Employees' Pension Scheme (EPS).

If you were a member of the Employees' Pension Scheme (EPS) as on 1 September 2014 then your last chance to opt for a higher pension ends next week, on March 3. Further, the Supreme Court has specifically stated that if somebody had retired prior to 1 September 2014, then this benefit is not available to them. Therefore, there will be no impact on those who retired prior to that date.

The Supreme Court had ruled in November 2022 that those who were Employees’ Provident Fund Organisation (EPFO) members as on September 1, 2014 will now be eligible to opt for a higher pension by contributing on their actual basic wages instead of limiting the statutory wage ceiling (which currently is Rs 15,000 p.m; a lower limit for many salaried employees). This is assuming that your actual wages are higher than the statutory wage ceiling and you have been contributing to PF on the entire basic wages.

Further, the EPFO issued guidelines on February 20 for eligible employees to submit applications for a higher pension under the EPS. Even employees who had not earlier applied for this facility but were entitled to it, can now do so.

What is EPS and why has it suddenly become important?

All salaried employees get provident fund and pension benefit under two schemes, Employees’ Provident Fund (EPF) and Employee Pension Scheme (EPS), both governed by the EPFO.

Also read | The Ultimate EPF guide by Moneycontrol

Every month, 12 percent of your basic salary goes to your EPF account. Your employer matches that with another 12 percent. While your contribution goes entirely to the EPF account, a part of your employer contribution goes to your EPS account. Of the employer’s contribution, 8.33 percent of the statutory wage ceiling goes into another account, called the EPS. The remaining portion of your employer’s share goes into the EPF account. When you retire, you get the entire corpus from your EPF account as a lumpsum with interest. This is your retirement kitty.

Also read | EPF or NPS: Which is better for retirement planning?

The EPS corpus, which grows over the years till you retire, then pays you a regular pension, every month, after you retire. Thanks to the Supreme Court ruling, this kitty, which will pay your pension, is set to increase. But is that really in your best interests?

Side note: Unlike the PF, the EPS is not an employee-specific corpus. In simple words, your EPF contribution is set aside in specially- made corpus for you. At retirement, that corpus is yours; you get to withdraw it with principal (your original contributions over the years) plus interest earned over the years.

On the contrary, the EPS is not a corpus. The EPFO will pay you regular pension, out of the kitty you built through your EPS contributions over the years, till you live. After you die, your spouse gets 50 percent of the eligible pension. If both you and your spouse die, your children get pension equal to 25 per cent of the amount payable as widow pension till they reach 25 years of age. This is in addition to monthly widow/widower pension. But neither you nor your spouse nor your children (after you'll) get hold of this corpus.  if you die, your children get pension equal to 25 per cent of the amount payable as widow pension till they reach 25 years of age. This is in addition to monthly widow/widower pension.”

Before we answer the question on whether a higher EPS contribution works in your favour or not, let’s understand the background.

Why did the Supreme Court overturn an EPFO law?

Under the EPS regulations of 1995, employees were allowed to contribute to the EPS corpus, based on a salary that was higher than the statutory wage ceiling (Rs 15,000). But Saraswathi Kasturirangan, Partner, Deloitte India, tells us the EPS had provisions enabling employees to contribute on higher wages prior to 2014. However, not many employees had opted for the same or were aware of this.  From a practical standpoint, many employees who had chosen to opt for this, had their applications rejected by the EPFO. This eventually was challenged in the courts and the matter reached the Supreme Court.

Meanwhile, in 2014, the EPFO issued another circular, bringing in a few crucial changes in the EPS.

Firstly, whoever had been contributing to EPS as a percentage to a higher salary than the statutory wage ceiling must give a declaration in writing whether they would like to continue the higher contribution. If they fail to do so, whatever higher contribution went to the EPS will be taken out and deposited in their EPF accounts.

Secondly, EPFO changed the formula to calculate the quantum of pension an employee is eligible to receive after retirement. To be sure, the amount of pension you get from EPS, after your retirement, depends on your pensionable salary. The formula is: ‘Pensionable salary’ (average of last 12 months’ salary) x number of years of contribution / 70.

The EPFO changed the definition of pensionable salary in 2014. Effective 2014, the average of your last 60 months’ salary (seen at retirement age) is now considered. “This also meant that the government’s burden came down as the pension would decrease. If the average takes into account a longer past period, the figure would be low, as opposed to just your last 12 months’ salary,” says Kasturirangan.

Also read | How EPF changes made over the years have changed your retirement corpus

Thirdly, for those who had chosen a higher EPS contribution, the government mandated that an additional 1.16 percent per month of the differential salary (salary in excess of Rs 15,000; the statutory wage ceiling), needs to be deposited into the EPS account. This was also done to reduce the government’s burden since EPS is a defined benefit plan. In simple words, the pension that EPS pays you in your retirement years is a fixed amount (fixed by the formula we just told you about) and doesn’t depend on market vagaries. This extra 1.16 percent was drawn from the employee’s PF contribution.

Fourthly, and arguably the most important, the EPFO said that members earning more than Rs 15,000 basic salary a month would not be considered members of the EPFO.

All these matters eventually reached the Supreme Court.

Who does the Supreme Court ruling impact?

If you have been contributing to the Employees’ Provident Fund up to the maximum basic wage of Rs 15,000 a month, then you don’t have to do anything.

But if you had been contributing to the EPF before September 1, 2014, and your EPF contribution is based on your actual salary (basic wages in excess of Rs 15,000), you will now have to make a choice: either continue to have a limited EPS contribution or opt for a higher EPS.

Remember, even if your EPF contribution was being made on your actual wages, your 8.33 percent EPS contribution was still being made only on the statutory wage ceiling (Rs 15,000). Say, your monthly basic wage is Rs 50,000. And your employer allows you full EPF contribution. This means, every month a sum of Rs 6,000 (12 percent of your basic wage) used to go into EPF. Your employer matches this with another 12 percent (Rs 6,000). Of your employer’s contribution, a sum of Rs 1,250 (8.33 percent of Rs 15,000; the statutory wage ceiling) goes to the EPS. The remaining Rs 4,750 (Rs 6,000 less Rs 1,250) goes to the EPF.

This changes now. The Supreme Court has said that employees will now get a chance to opt for a higher EPS contribution based on actual wages. If you say yes, the EPFO will then go back to your joining date or November 1, 1995, whichever is later, and transfer the difference, retrospectively, from your PF account.

It will also additionally deduct 1.16 percent per month.

Should you opt in and out?

A higher pension contribution reduces the EPF lumpsum corpus that you get on retirement.

Kasturirangan says that there is no clear answer. “Look at your monthly salary. If you are in your 30s, 40s or early 50s, try and estimate as to how much your salary is likely to be in your 50s and the quantum of increments you are likely to get,” she says. Kasturirangan says that EPS provides a regular income in retirement years. “Being a defined-benefit scheme helps the retired, as the pension is not market-linked. Even in bad market conditions, you get your regular and fixed pension as has been fixed by the formula,” she adds.

And yes, it is always important to consider the impact on your taxes. The lumpsum PF balance available to you on retirement is tax exempt since you would have contributed for more than five years.  However, the pension will be received on a monthly basis and is taxable, emphasises Kasturirangan.

Further, she adds, “You will need to keep in mind that you are getting the pension instead of the lumpsum. The pension benefit is available to employees during their lifetime; the spouse gets 50% of the pension after the demise of the employee”.

Kiran Telang, a Mumbai-based financial planner says that the pension would certainly increase and the formula for paying this regular pension makes EPS “very attractive. No other instruments can beat its returns,” she says. That’s also its Achilles heel, Telang adds. “Will the EPFO be able to maintain the higher payout?” she wonders.

She recommends diversification. For those employees who have to give money back to the EPS to receive a higher pension, check if you have sufficient other corpus to generate income in retirement. There is no clarity yet on the modalities of the implementation and return generation for sustaining this payout. If things go wrong, can you afford to live comfortably without having to depend on this enhanced pension?

If not, then it might not be a good idea to opt in for a higher EPS contribution.