Moneycontrol PRO
Live: LIVE | Joshimath Crisis: Why Is The Hill Town Sinking?

SC permits pension contributions on higher salary. What’s in store for employers and employees?

While higher pension contributions would mean higher pensions for the employees, they should keep their current age, stage of employment, risk appetite, health condition, cash flow requirements, and tax impact, in perspective while deciding on whether or not to contribute to the EPS scheme on higher salary.

December 22, 2022 / 03:58 PM IST

The Supreme Court ruling on higher pension contributions has attracted considerable discussion. Does this bring cheer to members of the Employees’ Pension Scheme (EPS)? What is the ruling all about?

Employees contribute to provident fund (PF) at 12 percent of pay on a monthly basis with a matching contribution by the employer. Out of the employer contribution, 8.33 percent of pay is diverted to EPS.

However, pay for this purpose is capped at the statutory wage ceiling (currently Rs 15,000 per month). In other words, the pension contribution per month does not exceed Rs 1,250 p.m.

While the scheme provided an option for employees to contribute on higher pay to the EPS scheme, in practice not many employees had opted for the same.

Also read: The Moneycontrol EPF guide

Increase in statutory wage ceiling

In August 2014, when the notification for increasing the statutory wage ceiling to Rs 15,000 per month from Rs 6,500 per month was issued, certain other changes as listed below were also notified:

· New joinees with pay exceeding Rs 15,000 per month were not eligible to become EPS members.
· Pensionable salary for the purpose of determining pension was to be calculated at an average of the last 60 months’ pay, compared to the prevailing practice of 12 months’ average.

· Existing members who were contributing on higher pay were given 6 months’ time to file a joint declaration reaffirming their choice to contribute to pension on higher salary.

If the joint declaration was not submitted, the higher contribution made to EPS in the past would be transferred to the PF account, and future EPS contributions would be restricted on the statutory wage ceiling.

The validity of the notification was challenged in various courts, and ultimately the Supreme Court ruling of 4 November 2022, provided direction in this matter.

The latest SC ruling

The Supreme Court considered the challenges that employees would have faced due to ambiguity in the provisions and ruled that employees would have a four-month window to opt for higher pension contributions.

The Employees’ Provident Fund Organisation (EPFO) has been directed to issue guidelines for the same within a period of eight weeks. The opportunity is open to all employees who were EPS members as on 1 September 2014, and who have not been restricting their PF contributions to the statutory wage ceiling.

Also read: Why EPF is still a winner despite lowest rate in over four decades

Higher pension contributions

Higher pension contributions would definitely entitle employees to higher pensions. This could sound as an attractive proposition since the pension would be based on the average of the last 60 months’ pay, while the contribution would be made during the service period on much lower pay levels.

However, this is not the only factor that needs to be considered before a decision is made. Why? Simply because the funds that will move to EPS will get transferred from the employees’ PF account along with the interest credited for the same.

There would also be an additional payout of 1.16 percent of the differential pay from the employees’ PF contribution till the legislative amendments are made to nullify this requirement. This would mean that one would no longer be eligible to withdraw that portion in lump-sum.

Also read: New pension scheme is better than the old one. Are state governments listening?

The way ahead for employees

Should EPS members opt to contribute to the EPS scheme on higher salary? That will depend on a multitude of factors, such as the individual’s current age, stage of employment, risk appetite, health condition, cash flow requirements, tax impact, etc. Every eligible employee should therefore evaluate the alternate options and exercise their preference, since once the choice is made, it cannot be reversed.

So, how can employers help? They can enhance employee awareness and support employees with guidance on calculations, simulation tools, etc. to enable them to take an informed decision.

Employers having their own PF trusts have the additional challenge of managing the fund flow to meet the transfer requirements.

Overall, while the end is in sight, there is still a long road to be traversed.

(*Views expressed are personal)

(With inputs from Radhika Viswanathan, Executive Director, Deloitte Haskins & Sells LLP)
Saraswathi Kasturirangan is a partner with Deloitte India
first published: Dec 21, 2022 09:00 am