EPFO yet to provide clarity on 1.16% additional EPS contribution for higher EPS pension The Supreme court has asked the EPFO to work out alternatives. However, the EPFO is yet to come out with the clarity
The Employees' Provident Fund Organisation (EPFO) has activated an online application link to seek higher pension under the Employees' Pension Scheme (EPS), but EPS members are yet to get clarity on a critical issue related to the pension.A 2014 notification by the EPFO made it mandatory for employees opting for EPS contribution, above the wage ceiling of Rs 15,000, to pay 1.16% of basic salary above Rs 15,000 towards the pension scheme. However, the Supreme Court (SC) declared this 1.16% additional contribution as invalid on November 4, 2022, and asked the EPFO to work out alternatives.
Now the EPFO is expected to come up with a circular explaining its action in response to this observation by the Supreme Court. This will be important information that may change the pension dynamics for eligible EPS members. Any clarity regarding this will help employees get a more accurate estimate of their total additional contribution and future returns if they exercise the higher EPS option on or before May 3, 2023. They can compare it with other available options to take a call on whether to go for the higher pension or not.
We take you through the likely impact of the various options that the EPFO may have in this regard.
What SC judgment says about 1.16% higher contribution by employees
The Supreme Court ordered the EPFO to do away with the 1.16% additional contribution requirement and come up with a new mechanism within the scope of the EPF act or through a legislative amendment. The SC order stated, "The requirement of the members to contribute at the rate of 1.16 per cent of their salary to the extent such salary exceeds Rs.15000/ per month as an additional contribution under the amended scheme is held to be ultra vires the provisions of the 1952 Act."
However, the apex court allowed this additional 1.16% payout to continue for 6 months so that the EPFO can come out with a replacement mechanism.
Higher rate of contribution by employers towards EPS
One of the possible alternatives mentioned in the SC order is a higher rate of contribution from employers towards the EPS. "We do so to enable the authorities to make adjustments in the scheme so that the additional contribution can be generated from some other legitimate source within the scope of the Act, which could include enhancing the rate of contribution of the employers," the court observed.
New contribution rule through legislative amendment
In case no alternative can be found within the scope of the act, the SC indicated that the authorities go for a legislative amendment. "We are not speculating on what steps the authorities will take as it would be for the legislature or the framers of the scheme to make necessary amendment. For the aforesaid period of six months or till such time any amendment is made, whichever is earlier, the employees' contribution shall be as stop gap measure. The said sum shall be adjustable on the basis of alteration to the scheme that may be made," added the SC judgment.
Will employee be asked to pay a higher amount?
What options do the EPFO have to implement the SC judgment and replace the 1.16% additional contribution on EPS contribution above the wage ceiling of Rs 15,000? It doesn't look feasible under the existing act.
"It is difficult to assess the options available with the EPFO at this point," says Anshul Prakash, Partner, Employment Labour & Benefits, Khaitan & Co. "but what appears to be clear is that the burden of the additional contribution cannot be shifted to the workforce in any manner unless a higher rate of contribution on the part of the employees is stipulated under the statute itself by way of an amendment." Employees' contributions cannot be more than 8.33% even for EPS members who have exercised the option of higher contributions (and thus higher pension benefits), he says.
"Having said that, for 6 months from the date of the Supreme Court ruling, the EPFO may insist upon additional contribution (over and above as set out under the statute), i.e., 1.16% on salary exceeding Rs 15,000 per month, from such employees on a prospective basis. But even here, the arrangement can only be a stop-gap measure, and a much higher rate cannot be insisted upon beyond 6 months, according to the Supreme Court ruling," says Prakash.
Will employer be asked to share additional burden?
Many employers will also be looking at the EPFO for directions regarding the additional contribution as they suspect they might be asked to share the additional burden.
"Any burden shifted to the employer in this regard may be a difficult proposition as this may dissuade them from submitting a joint option with their employees for higher pension benefits for such employees," says Prakash.
However, increasing the rate of employers' contribution toward the EPS within its overall 12% contribution might be a feasible option. "It is crucial to note that the SC has observed that a legislative amendment may be imperative for this," says Sanjeev Kumar, Partner, Luthra and Luthra Law Offices India.
"However, considering the demarcation of powers, the SC could not direct the government to contribute, so it left the option to the concerned administrator to readjust the contribution pattern and it was observed that the best solution would be to raise the level of employer's contribution. However, this portion of the judgment was put in abeyance for 6 months so that the government is given time to bring in an amendment."
The impact on higher pension calculation
The apex court has also hinted that the EPFO could modify the pension calculation. Kumar says: "Some option that the EPFO may explore for implementation is that it can refund the additional contributions to members with a handsome interest component, that would make both ends meet. However, this would put a heavy burden on the government.
Also, the EPFO can explore the option of increasing the pension amount using the additional contribution. Another option may be a hybrid mode, where a certain amount is refunded with interest and the remaining amount be taken care of through a higher pension amount. However, this has to be necessarily taken into account by the government after sound legal advice to ensure their acts are within the legislative ambit and also ensure that the judgment is not flouted in any way."
What should the eligible employees do?
Any changes in the contribution rate or the computation of pension will require each EPS member to do a thorough cost-benefit analysis. Employees will need to calculate their net return in terms of increase in pension due to their additional contribution. For this, they will have to take into account all the missing contributions of the past and the additional future contributions together with accrued interest till the date of retirement to calculate the net return through increased pension.
EPS offers the option of family pension to the spouse after the death of the pensioner. However, no money is offered to the legal heirs of the pensioner or spouse after their demise. Thus, it is important to compare the returns on EPS contribution with the available annuity plans without the return of purchase price.
If the EPS offers a significantly higher rate, it is the worthwhile option. Else, individuals should explore other investment routes.
Don’t miss out on ET Prime stories! Get your daily dose of business updates on WhatsApp. click here!
This story originally appeared on: India Times - Author:Faqs of Insurances
