Key Elements to Be Considered as A Consequence of EPFO Exercise of Joint Option for Higher Contributions!
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Key Elements to Be Considered as A Consequence of EPFO Exercise of Joint Option for Higher Contributions!
Let Us Take a Brief Look at The Background:
The Employees’ Provident Fund Organisation (EPFO) has allowed its subscribers to opt for a higher pension amount by increasing their contribution towards the Employees’ Pension Scheme. (EPS).
Only those who were members of the EPF as on September 1, 2014, are allowed to opt for a higher pension.
The new rules allow subscribers and their employers to jointly apply for a higher pension under the EPS. Eligible EPF members can apply for higher pension by June 2023.
What is the existing pension structure?
Both the employee and the employer contribute 12% of the employee’s salary to the EPF.
While the employee’s entire part goes to the EPF, the employer’s contribution is split between the EPF (3.67%) and the EPS (8.33%). The contributions are payable on a maximum salary of Rs 15,000. For an international worker, the wage ceiling of Rs 15,000 is not applicable.
While an employee can contribute a higher sum towards the EPF, the employer is not obligated to follow it.
Who is eligible for pension under the EPS and how much?
You have to be an active EPS member with a contribution for at least 10 years to be eligible for a pension at the retirement age. For a regular pension, one must be at least 58 years old. Members can opt for an early pension, provided they have reached the age of at least 50 years.
Supreme Court say in its November 2022 judgment on the EPFO higher-pension case?
On November 4, 2022, the Supreme Court upheld the Employees’ Pension (Amendment) Scheme, which allowed the employees who were existing EPS members as on September 1, 2014, to opt for higher annuity up to 8.33% of their ‘actual salaries’, as against 8.33% of the pensionable salary capped at Rs 15,000 every month.
What does this mean for EPFO and members of EPS?
For members and employers, this EPF amendment implies a higher annuity/pension after retirement. If a member opts for a higher pension, the member would have to agree to the transferring of funds from the provident fund to the pension fund going back until September 2014.
Who can apply for the EPFO higher pension?
The following EPF members are eligible to apply for higher pension by June 2023:
- Employees who were members of the EPS prior to September 1, 2014, and who are already making a contribution to the EPS on a basic salary exceeding the capped salary of Rs 15,000 but their request for a higher pension was rejected by the EPF authorities.
- Employees who were members of the EPS as on September 1, 2014, and missed the opportunity to opt for a higher contribution to receive a higher pension after retirement.
- Employees whose contribution to the EPF scheme was higher than the wage ceiling of Rs 6,500 or Rs 5,000, as the case may be, are eligible for higher pension contributions. Such employees must have submitted a joint declaration with their employer to opt for higher pension contributions and their request would have been rejected by the EPF authorities.
Those who joined the EPF after September 1, 2014, are not eligible to apply for a higher pension.
How to apply for an EPFO higher pension?
The eligible EPF members may opt for a higher pension under the EPS latest by June 2023. The EPFO has activated the URL of the unified members’ portal to opt for higher pension which states – “Pension on Higher Salary: Exercise of Joint Option.
Those eligible members who wish to opt for a higher pension for their retirement may click on the link. They will need to input their personal details such as Universal Account Number (UAN), name, date of birth, Aadhaar number, and Aadhaar-linked mobile number. Once the member receives the authorization PIN and is validated as a user, he/she may submit the application to obtain a higher annuity during retirement years.
Key Elements to Be Considered Before You Opt for A Higher Pension Under Eps
Loss of benefits of compounding: There will be a reallocation of corpus from the EPF to the EPS scheme from the date of joining the scheme. This means a large portion of money needs to be paid from the EPF to the EPS to avail a higher pension, which will definitely deprive you of the benefits of compounding.
No interest in EPS: The contribution to the EPS does not earn interest the way it does in the EPF. Also, an EPS account does not offer you a choice of getting a lump sum at retirement. You are paid a pension.
No pension to early retirees: An EPFO member becomes eligible to receive a pension only after completing 10 years of service, after attaining 58 years of age. So, if you are looking at early retirement, opting for a higher pension may not benefit you.
Reduced pension to spouse: The nominee or the legal heir is eligible to receive the full amount invested under the EPF account at the time of death of the EPF member. However, the spouse gets 50% of the pension in case of death under the EPS.
Financial goals: Will you need a lump sum at the time of retirement to fulfil a specific goal? Will you be comfortable managing your money in case you receive your EPF corpus in one go? Such factors can also play a big role in deciding if you want your retirement corpus in a lump sum or as a higher annuity after your retirement.
The June Circular
The June Circular re-emphasizes the provisions of Paragraph 26(6) of the EPF Scheme and provides that an employee who intends to become a member of the EPF Scheme or contribute on monthly pay exceeding INR 15,000 would be required to submit a joint request along with their employer in the format appended to the circular, to the jurisdictional Regional Office.
The process of submitting the request would be digital, and the concerned Regional Offices would be notifying the digital channels pursuant to the June Circular. In terms of timeline, the June Circular requires the concerned officials to allow coverage or higher contributions, as the case may be, within 7 days of receipt of the joint request. In respect of covered members who have already been making higher employees’ provident fund contributions without a formal approval process, the June Circular clarifies that such members would also have to follow the above-mentioned process although this may be done at the time of final claim settlement.
Joint Requests under para 26 (6) will henceforth be made and allowed as follows:
(a) Any employee who intends to become a member of the Scheme and contribute to it on actual higher pay exceeding the statutory limit (presently Rs.15000/- per month) shall submit a joint request along with his employer in the proforma application
(b) The said joint request will be made through the employer through the jurisdictional regional office
(c) The employer shall further undertake in the proforma application to pay the administrative charges as payable on actual higher pay and to comply with all statutory provisions in respect of such employee.
Conclusions Which May Differ from Person to Person
The June Circular certainly brings in some clarity on an important process set out under the EPF Scheme, and it would be imperative for employers, particularly their human resources and payroll departments, to take note of the same. Having said that, what is concerning to some is the fact that the digital process of making joint requests has been left to the Regional Offices instead of having the mechanism set out in the already up-and-running Unified Portal of the EPFO operating at a Pan-India level. It may be the case that the EPFO makes use of the said portal for joint request applications consequently, but further clarity in this regard is most welcome.
Proprietary blog of Karma Global Tech Management LLC
This blog has been collated and compiled by the internal staff of Karma Global with the knowledge and expertise that they possess, besides adaptation, illustration, derivation, transformation, collection from various sources, for its monthly newsletter Issue 13 of July 2023 and in case of specific or general information or compliance updates for that matter, kindly reach out to the Karma Global Team – alliance@karmamgmt.com