Pension Contributions: After the decision of the Supreme Court, now the question arises whether EPS members should contribute to the EPS scheme on higher salary?
It will depend on many factors like current age, employment status, risk appetite, health status, cash flow requirement, taxes etc. This eligible employee should evaluate other options and then choose There has been a lot of discussion on the Supreme Court’s order related to more pension contribution. Is this good news for the members of Employees’ Pension Scheme ie EPS ? What is the significance of this decision?
Employees contribute about 12 per cent of their salary every month to the provident fund and the same amount is deposited by the employer. Out of the employer’s contribution, 8.33 per cent goes towards EPS. However, a wage ceiling (which is Rs 15,000 at present) remains in place for this purpose. In other words, the pension contribution per month does not exceed Rs 1,250.
Even though scheme employees have been given the option to contribute on higher wages to the EPS scheme , in practice not many employees have opted for it.
Increase in wage ceiling
In August 2014, when the notification was issued to increase the wage ceiling from Rs 6,500 to Rs 15,000 per month, some other changes were also made, which are as follows:
Those earning more than Rs 15,000 per month will not be eligible to become EPS members. The pensionable salary will be calculated on the average of the last 60 months’ salary to determine the pension, whereas the current system is the average of 12 months.
Existing members who are paying contribution on higher salary were given 6 months time to give a joint declaration confirming the option to contribute pension on higher salary.
If the joint declaration is not submitted, their contribution to EPS will be transferred to PF accounts and future EPS contribution will be capped at the wage ceiling. This notification was challenged in various courts and finally the Supreme Court gave its verdict on November 4, 2022.
The Supreme Court considered the challenges faced by the employees due to ambiguity in the provisions and ruled that the employees would have four months to opt for higher pension contribution.
EPFO was instructed to issue guidelines related to it within eight weeks. This opportunity was available to all employees who had become EPS members by September 1, 2014.
Higher pension contribution
The higher pension contribution will definitely make the employee eligible to get higher pension. This may sound like an attractive proposition as the pension will be based on the average of the last 60 months’ salary, while the contribution will be made at very low salary levels during the service period.
However, this is not the only factor that needs to be considered before making a decision. Why so? Simply because the funds going to EPS will be transferred from the PF account of the employees along with the interest.
An additional payment of 1.16 per cent from the salary will also be made as the difference from the PF contribution of the employees till a legal amendment is made to do away with this requirement. This would mean that now no one would be eligible to withdraw that portion outright.
Now the question arises whether EPS members should contribute to the EPS scheme on higher salary? It will depend on many factors like current age, employment status, risk appetite, health status, cash flow requirement, taxes etc. This eligible employee should assess the other options and then choose.
So how can an employer help? They can sensitize the employees and enable them to take informed decisions. Overall, there is still a long way to go.
