Successive governments in India have been trying to wean workers away from defined benefit pension plans, to market-linked ones. This is perhaps why the long-pending Supreme Court case on the Employees’ Pension Scheme (EPS) has generated so much interest.
Last week, the Supreme Court gave some employees a window of opportunity to opt for the EPS, a scheme guaranteed by the Government of India. Here’s what the ruling means for retirement plans.
Backdrop to ruling
All new employees joining the organised sector are automatically enrolled in the Employees Provident Fund Organisation (EPFO), meant to help employees with retirement savings.
Once you join EPF, your employer deducts 12% of your basic pay (plus permanent components such as dearness allowance) every month towards the fund, while making a matching contribution.
The EPF declares a fixed interest on your accumulated balance every year and pays you a lumpsum on retirement. While your 12% contribution goes entirely into your EPF account, 8.33% of your employer’s contribution goes into the EPS, a separate scheme meant to fund guaranteed pension after retirement. The government also adds 1.16% of pay to the EPS kitty every month.
On September 1, 2014, the government brought in certain amendments to restrict the EPS benefit to those earning less than ₹15,000/month and change pension calculation methodology. These changes were opposed by employees in some States who obtained a stay.
But last week, the Supreme Court (SC) pronounced its judgment, upholding the changes. Those interested in the ruling and its background can refer to this: https://www.thehindu.com/news/national/explained-the-supreme-court-order-on-pf-pensions/article66112704.ece.
The ruling has implications for all employees who are current or past members of EPF.
Whether you stand to gain or lose from the ruling depends mainly on two factors – whether you joined the EPF before September 1, 2014, or after, and whether your monthly pay comes to more than ₹15,000 or less. Here are the implications.
If you are an employee who joined the EPF after September 1, 2014, then your ability to benefit from EPS will now depend on your monthly pay. If your monthly basic pay exceeds ₹15,000, then you are not eligible to join the EPS.
Both, your own contribution and employer’s contribution, amounting to 12% each of basic pay, will go only into EPF account resulting in a lumpsum payout on retirement.
But this is not a bad thing. The EPF too is a high return-earning vehicle which has declared interest rates of 8%-plus even when market interest rates were hitting rock-bottom.
It is also a tax-efficient scheme. If you want a guaranteed pension after retirement, there are immediate annuity plans offered by insurers and schemes such as LIC’s PM Vaya Vandana Yojana to consider.
If you joined EPF after September 1, 2014, and earn less than ₹15,000, then you can benefit from the EPS. Your employer may already be contributing 8.33% of your basic pay to the EPS kitty every month. On retirement, you will be eligible to get a guaranteed pension from the government for lifetime. Read this for more on EPS:
To avail of EPS, you should have completed 10 years of service with organisations that are members of the EPFO. The quantum of pension will depend on your pensionable service (the number of years you have worked with EPF member firms) and pensionable pay after applying the cap.
The SC has upheld the government rule that the average will be based on the last 60 months pay and not 12 months. You can use the calculator provided by the EPFO to gauge how much pension you are likely to draw. https://www.epfindia.gov.in/EP_Cal/pension.html
If you have been a member of the EPF from before September 1, 2014, then your eligibility for EPS depends on your pay. If you earn less than ₹15,000 a month you will be an automatic EPS member on the terms explained above.
If you earn more than ₹15,000 a month, both your employer’s contribution and pensionable pay were to be capped at ₹15,000 a month. But the SC has granted such employees relief by saying that the EPFO shall give them four months’ time to join the EPS at their actual pay, even if higher than ₹15,000. This can substantially lift your pension payout. This will require your employer’s consent and diversion of your employer’s past EPF contributions to the EPS at 8.33% of actual pay.
The SC has struck down the government requirement that you need to contribute an extra 1.16% of your pay over ₹15,000 to join EPS. Detailed guidelines from the EPFO are awaited on the modalities for joining.