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A Supreme Court judgement that was passed last year allows employees under the Employees’ Provident Fund (EPF) to contribute a higher amount to the Employees’ Pension Scheme (EPS) and enjoy higher pension on retirement. This has gathered a lot of eye balls and according to Rituparna Chakraborty, executive vice-president and co-founder, TeamLease Services, enquiries are coming in mainly from senior employees with 10-15 years work experience.

A clear cut answer may not be available as of now as EPFO has to clarify its stance on the matter. But we bring you some answers on who could benefit from the Supreme Court ruling. But let’s take a look at EPS first.

What is EPS?
If you are a salaried individual with an EPF account, you park 12% of your salary (basic plus dearness allowance) in your EPF account. This contribution is matched by the employer, but a part of that contribution goes into EPS. Till September 2014, this contribution was capped at 8.33% of Rs6,500 (Rs541) and subsequently, when the capped wages increased to Rs15,000, the contributions to EPS increased to 8.33% of Rs15,000 (Rs1,250).

On retirement, or when you turn 58 years old (assuming you have put in 10 years of eligible service), you are entitled to a monthly pension under the EPS. The formula is average monthly salary of the preceding 5 years multiplied by the number of years of service divided by 70. However, since the contributions were made only on the capped wages, the last drawn salary is considered to be the capped wages—Rs6,500 till 2014, Rs15,000 currently and Rs21,000 that’s proposed in the future. The pension amount in this case is not a very large number. Assuming a work life of 25 years, the pension will be about Rs2,321 a month.

But a provision that existed till September 2014 allowed you to bump up your contribution to enjoy higher pension. As per the EPS rules, an employee, with the consent of the employer, could hike the contribution to 8.33% of the actual salary (if it exceeded the capped wages) either from the date of commencement of the scheme or the time when the salary exceed the capped wages. Contributing on the actual salary meant a much higher pension. Assuming a person averaged a monthly salary of Rs50,000 in the last 5 years (till 2014, EPS considered average salary of last 12 months) the pension money would be Rs17,587, nearly eight times the amount under the capped wages of Rs6,500. This has been a little known fact and not utilised by majority of employees under EPFO.

“Very few employees were aware of this. And given when this came into force, we were probably not as connected (then) as we are today in terms of information dissemination. The private sector seems to have been completely in the dark,” added Chakraborty.

In fact, in September 2014, EPS saw some major amendments to the scheme. Three things happened: one, EPFO notified that new employees who earned more than the capped wages would not be eligible for EPS. Two, existing employees who were contributing on higher salary could continue to do so provided they made fresh applications along with the employer in a year’s time, failing which their contributions would be restricted to the capped wages. Three, for employees who were contributing on capped wages, the option to bump up the contributions was no longer available.

What the Supreme Court says
A Supreme Court ruling has renewed hopes for the employees who hope for a higher pension. On 4 October 2016, the court order dismissed the cut-off time laid down by EPFO to be eligible to contribute on a higher salary. As per the order, it’s not only at the time of launch of the EPS or when the salary exceeds capped wages can an employee bump up the contribution, but she can do so anytime. This was in response to an appeal filed by a group of employees who retired in 2005. They were not aware of the provision to increase the contribution and EPFO denied their request because they didn’t apply before the cut-off date.

The court order directed EPFO to divert the money from the provident fund of these retirees to the pension account retrospectively and pay pension on the higher salary. The court order has brought hope to existing employees as a popular view is that they can also benefit from this ruling. “Our understanding is that a member, existing or one who has left EPF, is eligible to make a higher contribution on the actual salary to the EPS retrospectively to enjoy a higher pension amount,” said Kulin Patel, head of retirement, South Asia, Willis Towers Watson. “In which case, the liability on EPFO could be significantly high. I am not sure if an impact analysis on the actuarial valuation of the liability has been done, but the differential cost will definitely be more than what EPFO will get by means of a higher contribution to the EPS,” he added.

Another interpretation, which has the backing of EPFO, is that this only benefits employees who retired before 2014.

What it means for you
For the purpose of EPS, employees can be divided across five categories. One, employees who joined after September 2014 and earn more than Rs15,000. Two, employees who continue to contribute on higher salary. Three, existing employees who contributed on capped wages. Four, employees who contributed on higher salary but didn’t exercise the right in 2014 by filing a fresh request. And five, retired individuals. For the first two categories, the ruling has no relevance because in the first case the employees are not covered by the EPS and in the second case the employees are contributing on the higher salary and will get a pension as per that salary.

The ruling would concern the remaining three categories. According to Sonu Iyer, tax partner & people advisory services leader, EY India, this would primarily concern employees who retired before September 2014. “The court ruling is on EPS that existed before September 2014, so eligible employees who left EPS before 2014 can approach EPFO, pay a higher contribution to the EPS retrospectively and get a higher pension. However, this may be easier for retirees who are yet to withdraw their money from the EPF as EPFO only has to reclassify the money from EPF to EPS. But for people who have already withdrawn their money, this may not be a smooth task as this will need them to make a deposit which will also need some system change,” she said. A senior official we spoke to at EPFO, who didn’t want to be quoted, also confirmed that as long as the retirees have been contributing 12% of the actual salary to EPFO, they will be eligible for a hike in pension by “retrospectively reclassifying monthly contribution in the pension from the provident fund provided.”

So what about existing employees in the EPS? According to the EPF official, the authority is still deliberating if the window to re-apply should be extended for employees who were contributing on higher wages, but failed to re-apply in 2014. If the extension comes through, even these employees will get a pension based on the actual salary. For existing employees contributing on capped wages, the circular doesn’t hold much relevance. “The Supreme Court ruling has not made any changes to the amendments of 2014. Even if the employees were to retrospectively contribute on higher wages, they will end up in loss because post-2014, only the capped wages will be considered as salary for the purpose of calculating pension,” said Iyer.

The EPF official we spoke to, confirmed this line of argument. However, EPFO is yet to issue an official clarification on the matter.