Higher EPS pension: Extra 1.16% to come from employer's, not employee's contribution; Impact on pension, EPF
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Higher EPS pension: EPFO extends deadline to June 26, 2023Higher EPS pension: How much do you have to pay to get it? New EPFO circular clarifies methodThe EPFO has finally come up with long awaited replacement methodology for contribution towards higher EPS pension. The members opting for higher pension will no longer have to contribute the additional 1.16% of their salary that is above the wage ceiling which was necessitated due to an EPFO amendment that came into effect from September 1, 2014. The Supreme Court, in its judgement announced on November 4, 2022, had declared this rule as invalid and asked EPFO to come up with a replacement mechanism."It has been decided to draw 1.16 % additional contribution from within the overall 12% of the contribution of the employers into the provident fund," the Ministry of Labour & Employment stated in a press release issued on May 3, 2023.
Why this ruling is important
Employees who have their wages below the wage ceiling are mandated to join EPFO and contribute towards EPF and EPS up to the prevailing ceiling. EPFO notifies the wage ceiling time to time. Employees who were members of EPFO prior to September 1, 2014 and continue to remain a member on or after September 1, 2014 are eligible to opt for higher pension if their salary was or is above the wage ceiling as per the recent SC judgement. However, if any eligible member opts for higher EPS pension, then he/she needs to contribute on actual wages, which is above the prevailing wage ceiling.For employees opting for higher pension, the EPFO had asked them to pay additional 1.16% on the part of their basic salary which was above the wage ceiling. But after the SC judgement and the current notification, employees will have to pay only 12% of the actual basic salary and not any additional amount for higher pension. Though SC had scrapped the additional 1.16% rule in November last year, EPFO came up with the methodology only on the last day of previous deadline of May 3 for applying for higher pension.
Though the deadline for applying for higher pension was extended till June 26, 2023, however, most of the employees were looking for clarity on what will be the replacement mechanism which will be implemented by EPFO. This new ruling will offer more clarity to employees so that they can analyse the consequence of going for the higher pension. They can now take a well-informed decision whether to apply for higher pension or not.
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Factor the higher contribution in the past as well
To become eligible for higher pension, only higher contribution on actual higher salary from now onwards will not be sufficient. Members will have to pay the dues for the past missing higher contribution along with accrued interest till date to be eligible for the higher pension. "This provision is retrospective in nature in line with the directions given by the Hon'ble Supreme Court," says the press release dated May 3, from the Ministry of Labour & Employment.
The 1.16% contribution will be added to the employer's contribution and therefore, the employer's contribution towards EPF will rise from 8.33% to 9.49%. Members will qualify for higher pension only when they pay the past missing contribution and interest there upon till date and agree to divert the higher part of 9.49% of actual basic salary from the employers' share towards EPS in the future.
However, in most of the cases of eligible members, employers were paying only 8.33% of prevailing wage ceiling towards the EPS and rest was paid towards EPF. However, this will not only change in future but also in the case of past missing contributions.
Will you benefit by going for higher EPS pension?
Whether you will benefit by going for higher pension will depend upon your employment history, wage growth, length of qualifying service, last 5-year average basic salary, how close you reach to retirement while contributing towards EPS. Under the current pension calculation in EPS 95, the pension amount depends on the total length of service and average basic salary of last 5 years. The higher the length of service, more rewarding will be the pension rule.To qualify for EPS pension, you must have a minimum 10 years of qualifying length of service. If you have a total length of eligible service of 20 years you will also get 2 additional years as bonus, which will push your pension up.
Another important factor is your last 5years' average basic salary. The higher is your salary in the last 5 years at the time of retirement, higher will be your pension. If your total length of employment with EPS contribution is 33 years you will get 50% of your last 5 years average basic salary as pension for life.
Critical to consider length of post-retirement life
A member's spouse is eligible to receive half of the pension in case of death of the original pensioner. However, there is no provision in EPS 95 pension to return the corpus to the nominees after the death of the pensioner. The length of post-retirement life of the member and spouse will become a crucial factor in determining the return you will get on your additional contribution if you opt for higher pension. The higher the post-retirement life of the original pensioner, higher will the return on investment on the additional contribution for higher pension. If the post-retirement life is shorter, this option will not deliver good returns.
Though assured regular income from government is a facility which most people will love to have in their post-retirement life, however, here it may not be necessarily as rewarding in many cases since the contribution for this pension will come from your side. So eligible members will have to factor in this aspect before arriving at a final decision. Because you always have the option not to go for higher EPS pension and deploy your savings elsewhere and enjoy flexibility on its utilisation.
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This story originally appeared on: India Times - Author:Faqs of Insurances
