The EPFO has recently issued circular regarding the implementation of the directions of supreme court judgement in November 2022, regarding opportunity for certain employees to contribute a higher amount to the Employee Pension Scheme (EPS). The EPFO has allowed eligible subscribers to contribute to EPS on their actual basic wages instead of limiting the statutory wage ceiling(currently Rs 15,000 p.m).
Who is eligible?
Employees who were members of EPS prior to 1 September 2014 and continued to be members after this date and Employees / employers who had contributed PF on full salary (rather than restricting it to the threshold) employees who had not earlier applied for this facility but were entitled to it. Employees contributing to the Employees’ Provident Fund (EPF) up to the maximum basic wage of Rs 15,000 a month are not eligible.
Recap of Basics:
All salaried employees have mandatory EPF and EPS accounts. The 12% of basic deducted from employee salary goes to EPF. The employer matches this with a 12% contribution which gets split as 8.33 % into EPS and 3.67% into EPF. At retirement, the individual gets a lumpsum tax free amount from the EPF account and pension from the EPS based on a formula. On a basic of Rs 50,000, Rs 4750 is currently going to EPF and Rs 1250 is going to EPS since it is 8.33% of statutory wage ceiling.
Now employees will have a chance to opt for a higher EPS contribution based on actual wages. The change will be done on a retrospective basis and the difference will be transferred from the EPF to the EPS account.
Should you opt in?
Certainly opting in means higher pension for the subscriber in retirement. However, pension is fully taxable at marginal rate of taxation of the subscriber.
EPFO is yet to provide details on the method of deposit and that of computation of pension. Further, the corpus once transferred to the EPS cannot be transferred back. This means that once a subscriber opts in, they do not have the ability to change their mind. This seems unfair to the subscriber given that detailed working on computation of pension is not available to take an informed decision. Also, the viability of generating this EPS income for long is circumspect given the large base of eligible subscribers.
I would recommend not to go ahead with higher EPS in absence of the right information and at the cost of reducing the EPF. The EPF corpus at retirement comes tax free and can be structured to get regular monthly income probably, at a better rate. Hence having higher EPF means more flexibility and chance of higher returns. Another factor that goes against EPS is the fact that on death of the subscriber, the surviving spouse will only receive 50% of the pension that was being received by the subscriber.
For subscribers it is a choice of flexibility vs predictability of income at retirement for life. I would choose flexibility.
(The writer is a financial educator, founder director of Finsafe India Pvt Ltd and co-founder of Womantra)