Deadline for choosing higher pension option extended to June 26: Your key questions answered

Here are some aspects you need to ponder over before exercising your choice.

What does higher pension option mean?

At present, if your basic salary (mentioned in your salary slip), on which provident fund contribution is calculated is, say, Rs 50,000, your employer deducts 12 percent of this amount – Rs 6,000 – as your employees’ provident fund (EPF) contribution.

The organisation also contributes an equal amount towards your retirement benefits. A part of it (8.33 percent) is directed to the employees’ pension scheme (EPS), while the balance flows into your provident fund.

However, it is calculated on the statutory wage ceiling of Rs 15,000. Therefore, out of your employers’ contribution of Rs 6,000, Rs 1,250 (8.33 percent of Rs 15,000) goes towards EPS. This amount joins the pool created under the EPS to pay the regular pension income to member-employees with at least 10 years’ service and their dependent family members.

Now, after a Supreme Court verdict in November 2022, the Employees’ Provident Fund Organisation (EPFO) has agreed to allow eligible members to opt for pension calculated on a higher salary.

“So, you can now choose that out of the employers’ contribution, a higher amount – 8.33 percent of your actual basic salary - towards your pension needs,” says Kuldip Kumar, personal tax expert and former National Leader, Global Mobility Practice, PwC India. “Also, employees will need to make an additional contribution of 1.16 percent on salaries beyond Rs 15,000 per month, as per amendments made in the scheme in 2014. Although the Supreme Court did not uphold this change of seeking additional contribution, it allowed six months to make the changes in laws. Until then, employees will continue making this additional contribution of 1.16 percent.”

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

Are there any limitations I need to be aware of?

Put simply, higher contribution to EPS will mean higher pension for lifetime, after you retire. However, this also means that your PF corpus will shrink since the additional pension contribution will be diverted from your provident fund, retrospectively.

“The entire approach of contributing to higher pension is based on the understanding that the members would need to fund the EPS by diverting funds from the PF account for the past service period. This means that employees are required to divert 8.33 percent of the differential salary (that is, salary on which contributions are made, less the statutory wage ceiling) along with related interest to the EPS account,” says Saraswathi Kasturirangan, Partner, Deloitte India.

Who is eligible for pension on a higher salary?

Employees who were members of EPFO and EPS, prior to September 1, 2014, and who continue to be in service but missed availing the higher pension option earlier are eligible to apply. Those who retired before this date and had signed up for the higher pension option will have to validate the information.

Those who joined the workforce (specifically, signed up as members of EPFO) for the first time after this date, and earn a basic salary higher than Rs 15,000 do not need to take any action.

How do I opt for a higher pension?

Both employers and employees have to submit a joint declaration to the EPFO stating that they wish to opt for higher pension. The employer will have to approve the information. The EPFO has enabled an online facility and format for the purpose.

You will have to visit the EPFO’s member portal (https://unifiedportal-mem.epfindia.gov.in/memberInterfacePohw/) to complete the process. Ensure that your mobile number is linked to your Aadhaar. The EPFO field offices will scrutinise these forms and get back to employers, employees or pensioners if there is a mismatch or additional information or proofs are needed.

Also read: The Moneycontrol EPF Guide

What are the hiccups I am likely to encounter while completing the procedure?

There could be some practical roadblocks. “For instance, if an employee has worked with multiple organisations, it has to be ensured that the pension funds have been transferred and linked to the current UAN (Universal Account Number). There are mechanisms in place to do so when you switch jobs, but in practice, it may not happen and will impact the contributory period,” says Saraswathi Kasturirangan, Partner, Deloitte India.

According to her, the key challenge for employees would be to calculate the amount of funds that will need to be moved out of the PF account to the pension scheme retrospectively. “While the PF account statement will have the salary information, members could face challenges if they have changed employers. Having salary slips or PF account statements for all the past years would be helpful to arrive at the calculation,” she says.

Will I have to provide proof of having exercised the joint option prior to September 2014?

As per earlier circulars, uploading copies of such joint requests (by employers and employees), submitted to the EPFO at the time of first making contributions on a higher salary, was mandatory.

“In practice, this requirement was not actively enforced and it was therefore common for employers and employees to make contributions on higher salary without submitting a written request,” says Swarnima, Partner with corporate law firm Trilegal.

However, over the years, the EPFO had also accepted these higher EPS contributions without insisting on proof. “Therefore, the requirement to mandatorily submit the joint request at this stage raised hurdles for individuals who wanted to opt for higher pension. This was challenged before the Kerala High Court, which, on April 12, 2023, ordered that the mandatory requirement to submit the joint request should be relaxed. Following this, the EPFO amended the online joint option form in line with the directions issued by the Kerala High Court,” says Swarnima.

What are the mistakes I must avoid while making the joint application online?

Ensure that all information you enter online is accurate to avoid procedural delays in processing your joint option application. “For example, employees who have withdrawn funds from their PF account must agree to repay the amount, plus interest, to enable the EPFO to pay a higher pension. Employees must also ensure all submitted information is accurate, as self-revisions are not permitted after submission. Although the EPFO has stated that employers and employees will be provided with a one-month window to correct any errors or discrepancies, this could delay the joint option approval,” says Swarnima.

Which are the areas where clarity is awaited?

The future pension calculation formula is one such aspect. “Currently, this is defined as a pensionable salary X number of years of contribution / 70. Pensionable salary for this purpose has been defined as the average of the last 60 months’ salary. The application for higher pension contribution clearly calls out that the government is empowered to amend the scheme at any point in time, and that the members abide by the amended scheme. In practice, if the government subsequently amends the formula for pension, members may end up with lower pensions than expected,” says Kasturirangan.

Given that most employees work across multiple organisations during their careers, getting access to their historical wage data may not be easy.

“The last employer is required to validate the application and submit month-wise wage data for the applicant's entire membership period in EPS, 1995. This would be a challenge in cases where the employee has worked with multiple organisations, as the last employer would not have information of wage data for the entire membership period and would need to rely on the information submitted by the employee. Even otherwise, we are seeing instances where the employer may not have wage data for the entire employment tenure,” says Swarnima.

While EPFO will have the data, it is not clear how the process will go through without the last employer’s validation.

Given these factors, should I opt for a higher pension at all?

This is the most important question and the one you need to decide on at the earliest. “A large amount will be hived off from my PF to provide for my pension, but I have no idea about my life expectancy. What if the pensioner dies after, say, 10 years? This is an annuity scheme but it does not come with a return of purchase price option (unlike other annuity options). Also, it is based on a formula and is not linked to inflation (which means its value in real terms will erode over a period of time),” says Kasturirangan.

The methodology for pension computation is another challenge. “Some of the subscribers, based on the current formula of calculating pension, may find the return in the form of pension, on contribution on a higher salary, better than the market rate and/or return on keeping the money in PF. The method of computation of pension is yet to be rolled out, as stated in the EPFO circular dated February 20, 2023. Therefore, one should not get surprised where any changes are made in the manner of computation of pension, where authorities find it unsustainable to meet the pension obligations based on the current formulae and the corpus it has in hands,” says Kumar.

Moreover, while the PF amount received at retirement will be tax-free, pension income will attract tax.

However, there are others who feel the government-backed guarantee is alluring for many. “Money lying with the government can give more comfort to subscribers due to the government guarantee for this scheme. This could also tilt many subscribers towards the pension option,” says Kumar.