The Supreme Court recently made significant rulings pertaining to the Employees’ Pension Scheme (EPS), which is a part of the Employees’ Provident Fund (EPF) contributions. The apex court’s judgement has many operative parts for current EPF and EPS subscribers.
Read on to understand the implications of your pension payouts from the EPFO and the options before you.
Before and after 2014
The original EPF did not have any pension component in it. The EPS was brought into being in 1995. Accordingly, from the employee’s contribution of 12 per cent of basic pay plus DA (dearness allowance), 8.33 per cent was allocated to the EPS. This 8.33 per cent component was calculated on a maximum amount of ₹5,000, even if the actual salary was higher. The ₹5,000 limit was increased to ₹6,500 a year later. With this, the EPS contribution was calculated as 8.33 per cent of ₹6,500, which was ₹541.
In August 2014, the government brought in a few amendments to the EPS scheme. Notably, the cap was increased from ₹6,500 to ₹15,000. But more importantly, it gave the choice of contributing to the EPS on the actual salary, even exceeding ₹15,000–that is, 8.33 per cent on the actual salary (basic pay, DA and other allowances). At ₹15,000, the monthly EPS contribution would be around ₹1,250 (8.33 per cent of ₹15,000).
For pensionable salaries of up to ₹15,000, the government contributed 1.16 per cent towards EPS. So, for a person with a pensionable salary of ₹15,000, the government would contribute ₹174 (1.16 per cent of ₹15,000).
Also, for someone exceeding ₹15,000, the government would not contribute any amount. The employee herself had to contribute in such cases.
The amendment was effective from September 1, 2014.
Subscribers could opt for higher pension contributions and were given six months to do so.
But given that most subscribers were unaware of the amendments and the choice of making higher contributions, the scheme did not find takers.
Subsequently, when some subscribers discovered they had missed the scope for enhanced pension, they approached the courts. After many lower and high court litigations, the matter finally reached the Supreme Court.
Court’s timeline
The Supreme Court has asked the EPFO to give four months’ time for subscribers to opt for higher EPS contribution on enhanced salaries. It is expected that the EPFO would come out with a notification and detailed guidelines on how to make higher contributions soon.
Also, with regard to the additional 1.16 per cent contribution that a subscriber had to make on amounts greater than ₹15,000 as mentioned earlier (instead of the Central government), the court quashed the rule.
But as the EPFO asked for time to find the resources to fund the additional pension, it has suspended this part of the judgment for six months, by which time the EPFO and the government are expected to find ways to fund the pension.
How is the pension amount calculated?
To be eligible for a pension payout from the EPS, you need to have put in 10 continuous yearsof service with regular contributions.
For calculating the monthly pension after retirement, the following formula is used.
(Pensionable salary * Years of service)/70.
The maximum years of service used for the calculation is capped at 35. So, at the current levels, if the pensionable salary is ₹15,000 and the years of services are 35, then the pension a person will get monthly would be ₹7,500 ((15000*35)/70).
When the cap on the pensionable salary is removed, as it has been now, the monthly annuity after retirement would be higher depending on the increased contributions made.
For calculating the pensionable salary, the amendment in 2014 made it clear that the figure would be arrived at by calculating the average salary over the last five years of service.
The Supreme Court upheld this method of arriving at the pensionable salary.
There was some ambiguity on whether the period was last 12 months or last 60 months. But the SC upheld the government’s stand of last 60 months’ average for calculating pensionable salary.
What does this mean for EPS subscribers?
According to the apex court’s ruling, the new mode of pension calculation is barred for those who retired before September 1, 2014.
But those who were subscribers before and have continued to be so after September 1, 2014 and the current ones are allowed to opt for the enhanced EPS scheme. Those wanting a higher payout can opt for it when notifications are out.
If you opt for higher EPS contribution, remember that your take home salary could be lower during your working years. While a higher EPS is suitable for the post-retirement years, investors must not rely on this amount alone for their needs.
Options such as NPS and equity mutual funds over the long-term need to be opted for to accumulate a substantial corpus. Later, systematic withdrawals can be made depending on personal requirements while maintaining suitable asset allocation.