Understanding the implications of EPFO's new ruling on higher EPS pension contributions

The EPFO has replaced the old rule for higher EPS pension contribution, which required an additional 1.16% of salary above the wage ceiling, with a new methodology. The new ruling states that the additional contribution will be taken from within the overall 12% employer contribution to the provident fund. The Supreme Court had declared the previous rule invalid in November 2022. Eligible employees can now opt for higher pension by paying only 12% of their actual basic salary. The EPFO extended the deadline for applying for higher pension until June 26, 2023, giving employees time to understand the financial implications of their decision.

To be eligible for a higher pension, EPF members must pay the dues for the past missing higher contribution with accrued interest. The employer's contribution towards EPS will increase from 8.33% to 9.49%, and members will have to divert the higher part of 9.49% of actual basic salary from the employer's share towards EPS in the future. EPFO will compute the amount which the member has to pay for past missing contributions, and if there is a shortfall, members may have to pay from their bank account. The responsibility to contribute the additional 1.16% for the higher pension is now on the employer, which could reduce the employer's contribution to EPF and increase the EPS, potentially affecting the total provident fund accumulation and pension amount at retirement.

Whether you will benefit from opting for the higher EPS pension will depend on factors such as your employment history, wage growth, length of qualifying service, and average basic salary in the last 5 years. To qualify for EPS pension, you need to have a minimum of 10 years of qualifying service. If you have a total length of eligible service of 20 years, you will also get 2 additional years as a bonus. The pension amount in EPS 95 depends on the total length of service and the average basic salary of the last 5 years. 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.

When considering opting for a higher EPS pension, it's crucial to factor in the length of the member and spouse's post-retirement life, as there is no provision for returning the corpus to nominees after the pensioner's death. The return on investment for the additional contribution towards a higher pension will be higher if the post-retirement life is longer. Eligible members should consider this aspect before making a final decision, as the contribution for this pension comes from their side, and they always have the option to invest their savings elsewhere.

The EPFO has provided an online functionality for employees to delete their application for higher EPS pension and file a new one with accurate details and uploads. However, this option can only be used if the employer has not responded to the original application. If the employer has already acted upon the application, the employee can still correct mistakes after the Field Offices review it. The length of post-retirement life is a crucial factor in determining the return on investment for higher EPS pension, and members should consider this before making a final decision.

EPFO has extended the deadline for applying for higher EPS pension from May 3, 2023, to June 26, 2023. On May 4, 2023, EPFO announced that the additional 1.16% contribution towards higher EPS pension, which was previously mandated for those earning above the wage ceiling, will now be drawn from within the overall 12% contribution of the employer. This comes after a Supreme Court judgment declared the previous rule invalid and ordered EPFO to come up with a replacement mechanism.

The author is a Chartered Accountant with 2 decades of experience into Accounting, Taxation, Auditing, Risk & Compliance, Credit Controls, Due diligence. Currently, the author is the founder and managing partner at RRL Global services.