Personal Finance

What you should know about EPFO pension

Satya Sontanam BL Research Bureau | Updated on January 20, 2021

It assumes significance in the backdrop of some expected changes in the structure

The Employee Pension Scheme (EPS) hogged headlines recently. Reports suggested that the Centre wants the EPS to be moved from a defined benefit scheme to be a defined contribution scheme.

If this proposal sees the light of day, it may change the amount of pension you will receive from the government under the EPS scheme. Being a defined benefit plan, EPS provides a specified pension amount to the member based on employees’ salary, number of years of service and the age of retirement.

But in a defined contribution plan, basis which the National Pension Scheme operates, the pension amount depends on the amount of contribution.

NPS is a voluntary contribution pension scheme while EPS is mandatory for eligible members. Here, we look at some of the important aspects of the current Employees’ Pension Scheme.

Eligibility

All employees in India who are enrolled with the Employees Provident Fund Organisation (EPFO) automatically become members of EPS as well.

But in a major amendment to the EPS in September 2014, the eligibility to the scheme was limited only to those EPFO members whose basic pay plus DA (dearness allowance) is up to ₹15,000 per month. Thus, if you have joined the workforce on or after September 1, 2014, you are likely be part of only the provident fund scheme and not the pension scheme.

Contribution

When you become a member of EPFO, your monthly salary is credited only after the deduction of 12 per cent of your basic plus DA towards the provident fund. The employer also makes a matching contribution of 12 per cent from their pocket towards your retirement corpus.

Out of the employer’s contribution of 12 per cent, 8.33 per cent goes into the EPS fund and only the balance 3.67 per cent goes towards provident fund accumulation. The central Government also contributes 1.16 per cent of the pay (basic+DA) of the employee towards the EPS.

However, there is a cap on EPS contribution. Where the pay of the member exceeds ₹15,000 per month, the maximum pay on which the contribution is payable by the employer and the Centre is limited to ₹15,000 per month (₹6,500 until September 1, 2014). Thus, here,maximum employer contribution to the EPS account on behalf of a member per month will not exceed ₹1,250 per month (8.33 per cent of ₹15,000).

Higher contribution beyond the ceiling (₹6,500/₹15,000) was also allowed at the option of employer and employee, subject to conditions, but only for existing members as on September 1, 2014.

Pension payout

A member will be entitled to monthly pension payout until death if she has rendered eligible service of 10 years or more and retires on attaining the age of 58 years.

The monthly pension amount will be calculated based on salary and the number of years of service using the formula (pensionable salary*pensionable service/70).

The pensionable salary will be the average monthly pay drawn during the span of 60 months preceding the date of exit from the membership of the Pension Fund (this was at 12 months before the September 2014 amendment). The pensionable salary is, however, subject to a ₹15,000 per month cap. For example, if the average pay drawn during the last sixty months before exit is ₹50,000 and was in service for about 30 years, the monthly pension amount works out to about ₹6,429 (₹15,000*30/70).

In case of existing members as on September 1, 2014, who had been contributing on salary exceeding the wage ceiling (₹ 6,500/15,000), pensionable salary will be based on such higher salary. A member is also allowed to draw an early pension from a date earlier than 58 years of age but not earlier than 50 years of age. In such cases, reduced amount of pension will be paid.

Note that, irrespective of whether an employee has serviced for eligible number of years or not, the member will be eligible for some pension benefit in case of permanent and total disablement during the service.

In case of death of the member, where at least one month's contribution has been paid into the Employees' Pension Fund, the family (including widow and children) will obtain the pension benefits, subject to conditions.

Matter sub judice

Clearly, the 2014 amendments to EPS Scheme lowers the number of people that can be eligible for EPS benefits (due to wage limit of ₹15,000) as well as the amount of monthly pension (as, now the pensionable salary of average of last 60 months as against 12 months earlier).

The Kerala High Court, in 2018, set aside the amendments with respect to EPS in 2014. The EPFO filed a special leave petition against this in the Supreme Court, which was dismissed by the apex court in 2019. A review petition against this order of the Supreme Court has been filed by the EPFO and SC’s judgement on the same is awaited.

Meanwhile, many corporate firms seem to be following the EPS scheme as amended in September, 2014 for now.

Further, issues related to benefit of higher pension based on contributions on actual salary for employees of exempted establishments, too, awaits judgement from the SC.

EPFO, in May 2017, created two classes – exempted and non-exempt establishment and denied higher pension based on contributions on actual salary to employees of latter.

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Published on January 16, 2021
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