EPFO members are people who contribute to a retirement fund called Employees' Provident Fund Organization. When they retire, they can get a pension. Both the employee and employer contribute 12% of the employee's salary and dearness allowance to the fund. Out of the employer's 12% contribution, 8.33% goes to the Employees' Pension Scheme (EPS) and 3.67% to the EPF. However, the EPS contribution is capped at Rs. 15,000 even if the employee earns more. This cap was introduced in 2014. Before this, employees could choose to contribute more to the EPS if they wanted to. An EPFO circular explains how members can claim higher pensions if they want to contribute more to the EPS. In 1995, the government introduced a pension scheme called Employees Pension Scheme, 1995 (EPS-95) under the EPF Act. Under this scheme, the employer had to contribute 8.33% towards the pension scheme, but the maximum monthly pension was capped at Rs. 5,000 or Rs. 6,000. Later, the maximum pensionable salary was increased to Rs. 6,500. In 1996, a provision was added to allow employers and employees to contribute 8.33% of the actual salary above the cap to the EPS. However, employees had only six months to file a joint option form for higher pension contributions. In 2014, the government amended the EPS-95 scheme, increasing the maximum pensionable salary to Rs. 15,000 and removing the provision for higher contributions. This meant that employers would only contribute 8.33% of a maximum of Rs. 15,000, even if the employee earned more. However, employees who were part of the EPS-95 scheme or joined before 01/09/2014 could still contribute 8.33% of their actual salary if they filed a joint option form with the EPFO before 28/02/2015.
In 2014, the government changed the pension contribution scheme for employees who were members of the EPF. Employees had the option to contribute 8.33% of their actual salary amount to the EPS pension fund, but they had to file a joint option form for this. Many employees did not know about this option and missed the deadline. After retirement, some employees found that their pensions were lower than they expected because their contributions were based on a maximum salary cap of Rs.15,000. The employees went to court to claim a higher pension based on their actual salary. The Supreme Court decided that employees who missed the deadline to file the joint option can still file it by 03/05/2023. The higher pension contribution will be calculated from the date of their joining. The EPFO will transfer the difference amount from the PF account to the EPS account. However, the higher pension contribution will reduce the EPF lumpsum corpus that the employee gets upon retirement.
In December 2022, the EPFO issued a circular stating that employees who retired before 01/09/2014 and exercised the joint option under para 11(3) of EPS-95 to contribute to EPS on salaries exceeding the wage ceiling of Rs.5,000 or Rs.6,500 can claim a higher pension. However, the circular did not provide a higher pension option for employees who were part of the EPF before 01/09/2014 but still working/retired after 2014. To address this, in February, the EPFO issued another circular stating that such employees can file a joint option for a higher pension if they were members before 01/09/2014 and continued to be members after that date, and if they and their employers contributed to EPS on salaries exceeding the wage ceiling. However, employees who were members of EPS-95 and exercised the joint option provided under the deleted para 11(3) of the EPS but did not file new joint options after the amendment of 2014 are not eligible for a higher pension. Their EPS contributions will be 8.33% on the maximum amount of Rs.15,000, regardless of their actual salaries.
To apply for a higher pension in EPF, employees need to visit the EPFO Unified Member portal and click on the 'Application form for joint option' option. If they retired before 2014, they need to click 'Validation of joint options who retired before 01.09.2014 and exercised joint option'. If they retired after 2014, they need to click 'Exercise of joint option for employees who were in service prior to 01.09.2014 and continued to be in service 01.09.2014 but could not exercise the joint option'. After filling in the details and submitting the form, the EPFO will digitally register each application and provide a receipt number. The application will be forwarded to the respective employers, who will verify them through e-sign/digital signature for further processing. The RPFC will convert all applications into e-files and examine them. The decision on the higher pension will be communicated to the applicants via email, post, phone, or SMS.
Employees who are eligible for a higher pension claim can apply online or at regional EPF offices. They need to fill out a joint option/higher pension claim application form that contains a disclaimer or declaration, and give explicit consent for a share adjustment from PF to EPS and a re-deposit of the amount. They should also provide proof of joint option verified by the employer, remittance of EPS contribution in the PF account exceeding the wage limit, and a written refusal of APFC or EPFO to such remittance or request.
To calculate the monthly pension amount, the EPS pension formula is used. The pensionable salary is the average of the last 60 months' salary, and the pensionable service is the number of years contributions were made to the EPS account. If an employee superannuates at 58 years after rendering pensionable service of more than 20 years, a weightage of 2 years will be added to the service period. The maximum pensionable service is limited to 35 years.
Monthly pension amount = (Pensionable salary X pensionable service)/70
For example, if an employee like Mr. 'X' exercised the joint option to receive a higher pension, his average monthly salary was Rs.100,000 for the last five years, and he rendered services for 25 years. He superannuated at 58 years. As per the pension calculation formula, the monthly pension amount will be Rs.38,571. 100000 x 27 (25+2)]/70]
The higher pension scheme is beneficial for those who want a higher monthly pension but do not need a large lump sum after retirement. By contributing more towards the scheme, the monthly pension amount increases, but the EPF lump sum decreases. It is suitable for individuals who have other investments and will receive a lump sum upon maturity. However, the monthly pension is taxable, unlike the tax-exempt lump sum EPF amount given after retirement.
Author is a Chartered Accountant with 2 decades of experience into Accounting, Taxation, Auditing, Currently Author is founder and member of RRL Global Services an advisory and consultancy firm.
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