Higher Pension Option—Who Can Apply And How?

In November 2022, in a landmark decision, the Supreme Court, in the case of EPFO vs. Sunil Kumar, provided employees with a fresh opportunity to opt for additional pension benefits within a limited window.  

What Is The Change?  

Today, the employer and employee contribute 12 per cent of the salary towards the provident fund (PF) and employee pension scheme (EPS). Out of the employer’s contribution of 12 per cent, 8.33 per cent of the statutory threshold goes to the employee pension scheme. The remaining balance is credited to the employee provident fund. In addition, the government contributes 1.16 per cent to an employee’s pension fund, capped up to the maximum pensionable threshold. However, the pension scheme provides the employee an option of contributing to the pension on a higher salary through a joint declaration signed by both the employer and the employee.  

The Supreme Court, while examining the validity of the PF circular dated August 2014, held that EPS members who had not opted for higher pension contributions earlier but would like to opt now could do so within four months from the date of the ruling. The EPFO website now indicates that applications should be made before May 3, 2023.  

Who Is Eligible To Opt?  

Employees who are members of EPS on or before September 1, 2014, contributing to PF on a higher salary, i.e., where contributions to PF are on wages greater than Rs 5,000, Rs 6,500, Rs 15,000 per month, and who had not opted for higher EPS contribution in the old scheme, are eligible to apply. Further, the above-stated employees who applied for higher EPS contributions earlier than September 2014 but whose applications were rejected by the EPFO are also eligible to apply.

Impact Of Opting Now

When an eligible employee opts for contribution to EPS on higher wages, the difference between 8.33 per cent of pensionable salary and the amount already contributed to pension every month, along with interest from the date of EPS membership, would be transferred from the PF fund to pension fund. Additionally, 1.16 per cent of the pensionable salary, less the statutory threshold, would be transferred from the employee’s contribution. Consequently, the balance in the PF account would reduce, and the employee would be eligible for a higher pension.  

How To Apply  

The Employee Provident Fund Organisation (EPFO) has deployed a weblink on the members’ page, enabling eligible employees to opt for higher pensions. Once submitted, the application would need to be verified by the employer. The officer-in-charge in the EPFO shall examine the validity of the application form and accordingly intimate the employee about the outcome.

Critical factors for decision making

Pension is available to employees at retirement after attaining the age of 58 if they have contributed to the EPS for at least 10 years. Option to avail early pension is available between the ages 50 and 57, but with reduced pension. If an employee has worked for less than 10 years, lump-sum benefit is available to the individual. There are other instances as well when the pension is available to individual/legal heirs/nominees of the employee on the happening of contingent events such as death of the employee.

One needs to understand that contribution of higher pension comes with the cost of reduction in the EPF corpus, which is allowed to be withdrawn as a lump-sum benefit as per the eligibility norms. Where higher pension means higher monthly regular income post retirement, higher EPF corpus means higher lump-sum amount on retirement. Monthly pensions payments are taxable whereas lump-sum withdrawal of EPF (post continuous contribution of five years) is tax free.

The requirement of funds can differ from person to person, and one has to evaluate based on the long-term financial goal, return for future, life expectancy, contributory period, retirement age, financial requirements, number of years of service etc. Based on these factors, each employee can decide on whether to opt for higher pension or not. But one needs to be mindful that a choice once availed is irrevocable.

Aarti Raote is a partner with Deloitte India. Tridev Agarwal is a manager with Deloitte Haskins & Sells LLP.

(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)