Is higher EPS pension still as attractive? 9.49% of salary to go from employer's contribution into EPS

The Central Government has invoked specific provisions of the Code on Social Security, 2020 requiring 1.16% additional allocation of employer's contributions towards the Employees' Pension Scheme (EPS) for employees opting for higher pension. This has been done via notifications dated May 3, 2023.

For an employee who opts for higher pension, the following amounts will now be allocated out of employer's share of monthly contributions towards the EPS:

(i)8.33% of basic wages, dearness allowance and retaining allowance; plus

(ii)1.16% of basic wages, dearness allowance and retaining allowance exceeding INR 15,000 per month

This would mean that for an employee opting for higher pension - out of employer's contribution of 12% of monthly pay to the Employees Provident Fund (EPF), almost 9.49% of pay will be allocated to the EPS and only balance will be allocated to the EPF.

This change is retrospective effective September 1, 2014.

For instance, let us assume an employee who has joined employment in January 2010 opts for higher pension. For such employee, for the period January 2010 to August 2014 - 8.33% of pay would have been allocated from the employer's EPF contribution to the EPS and for the period September 2014 till end of employment - almost 9.49% of pay will be allocated out of employer's EPF contribution to the EPS.

As per earlier guidance from the EPFO, such reallocation of funds from the EPF to the EPS will be along with interest accrued in prior years.

This will reduce the accumulated corpus under the EPF leading to reduced lump-sum amount available on retirement or specified events.

The Supreme Court in its ruling dated November 4, 2022 held that requirement for employees to contribute 1.16% of pay exceeding Rs 15,000 per month to the EPS (if higher pension option is availed), which was introduced effective 1 September 2014, is ultra-vires the provisions of the Provident Fund Act. The Supreme Court suggested that the authorities may make adjustment to the scheme provisions so that additional contributions can be generated from some other legitimate source within the scope of the Provident Fund Act which could include enhancing the rate of contribution of the employers.

For 6 months from the date of ruling, the Supreme Court allowed employee's additional contribution @ 1.16% of pay exceeding INR 15,000 per month towards the EPS to continue for those employees who opt/ had opted for higher pension. In effect, till the May 3rd notification, the EPFO could have recovered the extra 1.16% from employees' contribution to EPF (as permitted by the Supreme Court). However, now the extra allocation will come from the employer's contribution and will continue till date of retirement.

Since the current Employees' Provident Fund Act does not allow employer's contribution to the EPS in excess of 8.33% of pay, the Central Government has implemented specific provisions of the Code on Social Security 2020 on 3 May 2023, which provides flexibility to the Central Government to decide the rate at which contributions can be allocated to the Pension Scheme.

Employees will need to do calculations to determine whether higher pension under the EPS is still attractive. For instance, let us assume that both Employee A and Employee B earn monthly basic salary of Rs 1,00,000 and date of joining EPF, EPS, other eligibility conditions are same for both. If Employee A does NOT opt for higher pension, out of monthly contributions (total Rs 24,000), only Rs 1,250 will go to the EPS and remaining Rs 22,750 will go the EPF. However, if Employee B opts for higher pension, out of monthly contributions (total Rs 24,000), Rs 9,316 will go the EPS and balance Rs 14,684 will go the EPF.

While Employee B will be eligible for higher pension after attaining 58 years of age, his accumulated corpus under the EPF will reduce.

Particulars	Employee A (Higher pension not opted for)	Employee B (Higher pension opted for)
Basic Salary	1,00,000	1,00,000
A. Employee’s contribution, split as follows:	12,000	12,000
To Pension Scheme	-	-
To Provident Fund Scheme	12,000	12,000
B.Employer’s contribution, split as follows:	12,000	12,000
To Pension Scheme	1,250	9,316
To Provident Fund Scheme	10,750	2,684
Total contribution to Pension Scheme	1,250	9,316*
Total contribution to Provident Fund Scheme	22,750	14,684
Total	24,000	24,000

* 8.33% of INR 1,00,000 plus 1.16% of INR 85,000 (INR 1,00,000 less INR 15,000)

(The author is partner - People Advisory Services, EY India. Views expressed are personal)