Frequently Asked Questions (FAQs) - Higher Pension Scheme

Responses to queries on Higher Pension Scheme under EPS, 1995, collated by Experts

Anurag Jain
Anurag Jain

Published on: Jun 16, 2023

Updated on: Mar 29, 2024

(24 Ratings)
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Employee Pension Scheme – Brief Description

Employees’ Pension Scheme, 1995 (EPS-95) is a social security scheme introduced in November 1995, by the Central Government. This is a mandatory scheme which entitles the employees working in organized sector to receive benefits of pension after attaining the age of 58 years or premature death. Under EPS 95, 8.33% of the employee’s pay is diverted from the provident fund to Pension Fund. The contribution is subject to the prescribed statutory salary limit under EPS 95, which underwent the following changes in due course:

  • INR 5,000/-: March 96 to May 2001
  • INR 6,500/-: June 2001 to August 2014
  • INR 15, 000/-: September 2014 till date

The Central Government also contributes 1.16% on the prevalent pensionable salary as additional contribution. However, the EPS scheme was amended in March 1996, with employees being given an option to contribute on full salary, by inserting proviso to para 11(3) to EPS 95.

Para 11 (3) had a condition that the payment of Pension contribution on wages above the wage ceiling had to happen from the month in which the wages crossed the ceiling for the first time.

Thus, a member whose wages were say INR 10,000 in 1996 but for whom the employer restricted the employer contribution on wage ceiling INR 5,000 and later decided to pay the PF employer contribution on wages above wage ceiling are not eligible for higher pension since the Pension contribution is diverted from the employer share only.

Vide EPS Amendment of 2014 (2014 Amendment), this inserted provision was repealed with effect from September 2014. However, employees who had already taken option to contribute on actual salary could exercise the option again within a period of 6 months extendable to 1 year.

In addition, such members had to contribute additional 1.16% of wages above the wage ceiling from 01-09-2014.

However, such members if not agreeing to contribute the additional amount/ exercise the option had an option to get the refund of the higher contributions made till August 2014 for diversion from the Pension Fund to Employer share of PF

Supreme Court judgement dated 04.11.2022 on EPS 1995 for enhanced pension.

The Supreme Court in its recent judgement dated 04.11.2022, decided on the issues:

  • Validity of 2014 Amendment.
  • Validity of EPFO circulars discriminating the exempting and non – exempting establishments.

The provision for contribution on actual salary was repealed with effect from 1st September 2014. The Supreme Court has upheld the validity of 2014 Amendment after the same was successfully questioned by the Kerala High Court. However, while upholding the 2014 Amendment it has given the following directions:

  • Fresh options could be made within a period of 4 months from the date of the judgement by eligible employees.
  • Such option is available for employees who had earlier not taken option for contributing on actual salary and were member of the Pension Fund on or before 01.09.2014 and continued to be a member of the Pension Fund after 01.09.2014.
  • Employer must have contributed provident fund on actual salary to exercise the option. This contribution must have come from the month in which the wages crossed the wage ceiling
  • The benefit of the judgement is also available to exempted establishments.

The webinar conducted by us saw many queries from the participants. As a follow up to the webinar, please find below a set of 10 Frequently Asked Questions (FAQ), which shall aid in understanding of the judgement.

The following categories of employees are eligible to opt for higher pension scheme:

  • Employee who retired prior to September 01, 2014, and had exercised the joint option under pre-amended Para 11(3) while contributing towards EPS-95/Pension.
  • Employees who were members of Pension Scheme, prior to September 01, 2014 and:
    • Continue to be members on or after the said date; and
    • Were not able to exercise joint option under pre- amended Para 11(3) while being member of EPS-95.

Based on the SC ruling, the following categories of employees are not eligible for higher pension scheme:

  • Employees contributing towards EPFS up to a wage ceiling of INR 5,000/6,500 up to 31st Aug, 2014;
  • Employee who became members of PF on or after September 01, 2014 on wages up to wage ceiling of Rs 15000/-;
  • Employees who became members of PF with wages above wage ceiling on or after 01-09-2014 are not eligible for EPS membership.
  • Employees who retired and exited from membership prior to September 01, 2014 without exercising joint option under pre-amended Para 11(3) of the EPS-95;

Employees who were contributing towards EPS on higher wages as per Para11(3) of the EPS-95 and failed to submit joint declaration under the amended scheme of 2014 i.e. u/p11(4) of EPS 1995, by 31st Aug, 2015.

(The above eligibility criteria has been determined based on our understanding of the SC ruling, circulars issued by the PF authorities and our time-to-time discussions with subject matter experts. In case, there is any change in understanding based on the future clarification provided by the PF authorities, we will surely keep you posted.

The PF and EPS is calculated in the below manner in both the scenarios. If assumed monthly basic wage is INR 100,000 per month.

Scenario Particular Employees’ share @12% Employer Share @12%
Contribution to Provident Fund Contribution to Pension @ 8.33%
Employee do not exercise the option Contribution towards EPS on wage ceiling of INR 15,000 12,000 10,750 1,250
Employees exercise the option Higher contribution for both schemes 12,000 2,684 8,330+9861

The effective date shall be when the salary crosses the statutory ceiling as prescribed from time to time under the EPS’ 95. Statutory ceilings.

  • INR 5,000 pm from Mar 1996 to May 2001
  • INR 6,500 pm from June 2001 to Sep 14
  • INR 15,000 pm from Oct 14

No. There is likely to be a bar on withdrawal of the option from the EPFO Authorities.

The joint option can be exercised from the date employee start contributing the PF on the higher basic wage instead of wage ceiling and once the option is exercised, the differential EPS will be recovered and may be with interest from the EPF balance.

Illustration* I–

  • Employee become member of EPF and EPS Schemes 01st April 2010
  • Contributing the PF and EPS on wage ceiling of INR 6500/- till 31st Dec 2012.
  • Employee starts contributing the PF on higher basic wage of INR 10000/- with effect from 01st Jan 2013 onwards and continued to contribute on EPS on wage ceiling of INR 6,500/-
  • Such employee will not be eligible for higher wage option.
  • The differential EPS contribution with effect from 01st Jan 2013 will be recovered from the PF balance of employee and may be with interest earned on the PF.
  • In case of shortfall of the differential EPS contribution, employee may have to return it along with interest.
  • The above illustration is subject to interpretation by EPFO and provisions of EPF & MP Act 1952 and Schemes framed thereunder.

Illustration* II–

  • Employee become member of EPF and EPS Schemes 01st April 2010
  • Employer Contributing the PF on actual wages of INR 10,000 and restricted EPS contribution on wage ceiling of INR 6,500/-
  • The member continued in employment after 31-08-2014 when his wages had reached above INR 15,000
  • Such employee will be eligible for higher wage option.
  • The differential EPS contribution will be recovered from the PF balance of employee and may be with interest earned on the PF.
  • In case of shortfall of the differential EPS contribution, employee may have to return it along with interest.
  • The above illustration is subject to interpretation by EPFO and provisions of EPF & MP Act 1952 and Schemes framed thereunder.

Note:

  1. Employees are required to do due diligence in choosing which option is better for them.
  2. This consent does not guarantee that you will be eligible for higher pension contribution. This will depend on the EPFO final guideline. If the employee is eligible for higher pension contributions, then the amount will be transferred from the PF fund to the Pension Fund with up-to-date interest.

    While choosing to opt for higher pension contribution a member should note the following

    The new higher pension once fixed will be a final amount as the Pension is based on contributions and it is highly unlikely that any increase due to increase in cost of living will be there

    If the fixed pension/ arrears of pension difference is such that is above the Income Tax limit, the amount will be subject to TDS.

If there is no required balance available in the EPF Account, then the member has to pay back to the EPFO as per the difference amount calculated by the EPFO.

On receipt of demand from the EPFO Office the member will have to pay the due amount to employer who in turn will remit the amount with EPFO.

Since the amount is to be diverted or paid back to EPFO with interest till the last date of month in which the payment is made, the employers should ensure that they remit the amount in the same month in which they have received the money from the retired/ serving employee in cases where the PF balances are not sufficient for diversion of the full amount for which demand has been made.

Employees need to apply online in EPFO portal for merging past period pension. This is foremost and most important step while opting for higher pension.

Any member having employment under more than one PF Registered Establishment should apply for transfer all previous accounts to the present or the latest one

A member who joined an establishment on or after 01-09-2014 on wages above wage ceiling and who had a previous membership should also immediately apply for transfer. Otherwise, for want of any previous membership prior to 01-09-2014 he will become ineligible for EPS membership.

No formal due date has been notified by EPFO for employer’s verification. A suggested approach is to clear all pending application for approval at the earliest.

P.S: You may take independent advice from legal and financial experts in relation to the exercise of option under para 11(4) of the Employees’ Pension Scheme, 1995.

Disclaimer

The information provided in this article is intended for general informational purposes only and should not be construed as legal advice. The content of this article is not intended to create and receipt of it does not constitute any relationship. Readers should not act upon this information without seeking professional legal counsel.

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