The Employees’ Provident Fund Organisation (EPFO) has allowed its subscribers to opt for a higher pension amount by increasing their contribution towards the Employees’ Pension Scheme (EPS). The new rules allow EPF subscribers to contribute 8.33% of their actual basic pay towards the EPS to earn a higher EPFO pension. Earlier, the pensionable salary was capped at Rs 15,000 per month. The purpose of the EPS is to generate a pension for employees after the age of 58 years.
Only those who were members of the EPF as on September 1, 2014, are allowed to opt for a higher pension. The new rules allow subscribers and their employers to jointly apply for a higher pension under the EPS. Eligible EPF members can apply for higher pension by May 3, 2023.
Both the employee and the employer contribute 12% of the employee’s salary to the EPF. ‘Salary’ here means basic salary and dearness allowance taken together. While the employee’s entire part goes to the EPF, the employer’s contribution is split between the EPF (3.67%) and the EPS (8.33%). The contributions are payable on a maximum salary of Rs 15,000. For an international worker, the wage ceiling of Rs 15,000 is not applicable.
While an employee can contribute a higher sum towards the EPF, the employer is not obligated to follow it.
You have to be an active EPS member with a contribution for at least 10 years to be eligible for a pension at the retirement age. For a regular pension, one must be at least 58 years old. Members can opt for an early pension, provided they have reached the age of at least 50 years.
Monthly pension = Pensionable salary × pensionable service / 70, on a pro rata basis linked to the maximum monthly pensionable salary of Rs 6,500 for the pensionable service up to September 1, 2014, and Rs 15,000 thereafter.
Fifty-four writ petitions were filed by the employees from both exempt and unexempted establishments asking for the amendments to be struck down. The employees cited a lack of information and awareness about the time window to opt for the amended pension scheme linked to a higher pensionable salary.
On November 4, 2022, the Supreme Court upheld the Employees’ Pension (Amendment) Scheme, which allowed the employees who were existing EPS members as on September 1, 2014, to opt for higher annuity up to 8.33% of their ‘actual salaries’, as against 8.33% of the pensionable salary capped at Rs 15,000 every month.
EPFO’s February 20, 2023, circular confirms that employees who have been contributing towards the EPF on the full basic salary (without capping salary to Rs 15,000) and who have not opted for a higher pension earlier and those who were EPS members prior to September 1, 2014, and continued to be members on or after September 1, 2014, can opt for a higher pension now.
For the EPFO, the option of a higher pension to the EPS members may imply sharp pension payouts. It could be a strain on the finances of the retirement fund body in the future.
For members and employers, this EPF amendment implies a higher annuity/pension after retirement. If a member opts for a higher pension, the member would have to agree to the transferring of funds from the provident fund to the pension fund going back until September 2014.
The following EPF members are eligible to apply for higher pension by May 3, 2023:
Those who joined the EPF after September 1, 2014, are not eligible to apply for a higher pension.
The eligible EPF members may opt for a higher pension under the EPS latest by May 3, 2023. The EPFO has activated the URL of the unified members’ portal (EPFO link to opt for higher pension) which states – “Pension on Higher Salary: Exercise of Joint Option under para 11(3) and para 11(4) of EPS-1995 on or before 3rd May 2023.
Those eligible members who wish to opt for a higher pension for their retirement may click on the link. They will need to input their personal details such as Universal Account Number (UAN), name, date of birth, Aadhaar number, and Aadhaar-linked mobile number. Once the member receives the authorization PIN and is validated as a user, he/she may submit the application to obtain a higher annuity during retirement years.
Eligible members who are looking to apply for a higher pension under the EPS account must consider several factors detailed below:
Loss of benefits of compounding: There will be a reallocation of corpus from the EPF to the EPS scheme from the date of joining the scheme. This means a large portion of money needs to be paid from the EPF to the EPS to avail a higher pension, which will definitely deprive you of the benefits of compounding.
No interest in EPS: The contribution to the EPS does not earn interest the way it does in the EPF. Also, an EPS account does not offer you a choice of getting a lump sum at retirement. You are paid a pension.
No pension to early retirees: An EPFO member becomes eligible to receive a pension only after completing 10 years of service, after attaining 58 years of age. So, if you are looking at early retirement, opting for a higher pension may not benefit you.
Reduced pension to spouse: The nominee or the legal heir is eligible to receive the full amount invested under the EPF account at the time of death of the EPF member. However, the spouse gets 50% of the pension in case of death under the EPS.
Financial goals: Will you need a lump sum at the time of retirement to fulfill a specific goal? Will you be comfortable managing your money in case you receive your EPF corpus in one go? Such factors can also play a big role in deciding if you want your retirement corpus in a lump sum or as a higher annuity after your retirement.
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Written By Sridhar SahuSridhar Kumar Sahu is a Content Writer for ET Money. He has over six years of experience in covering personal finance topics and markets. He holds a Master’s degree in English Journalism from IIMC, New Delhi and B.Tech in Mechanical Engineering from BPUT, Odisha.
