Do new EPFO norms mean more pension?

In a recent move, upholding the judgment of the Kerala High Court, the Supreme Court directed the Employees’ Provident Fund Organisation (EPFO) to allow the pension to the employees based on their full salary. Before we dive into the impact of the apex court's decision on the employees, let’s check out the EPFO rule that was applicable before the judgment.

EPFO RULE BEFORE THE JUDGMENT

As per earlier the EPFO rule, all employees who qualified for EPF deduction were required to contribute at least 12 per cent of their salary, i.e. basic plus dearness allowance (DA). The employer was also required to make an equal contribution to EPS at the rate of 8.33 per cent of the salary or Rs 1,250 whichever was higher and rest to the employee’s EPF account. Employers considered a maximum salary up to Rs 15,000 for calculating the EPS amount. So the employer’s contribution to EPS was restricted to a maximum of Rs 1,250.

WHAT HAS CHANGED NOW?

After the court’s ruling, 8.33 per cent of your last drawn salary will go to EPS, if you choose the higher pension option. The pension is calculated as the number of years in service multiplied by last drawn salary and divided by 70. The salary in this context is basic plus DA. Earlier the salary was capped at Rs 15,000 but now the last actual drawn salary will be considered for employee’s contribution.

Let’s understand this with the help of an example. Suppose a person ‘A’ was getting a monthly salary (basic + DA alone) of Rs 8,000 in the year 2001-02 and the salary increased at a rate of 12 per cent every year, leading to a current monthly salary of Rs 54,938. According to the earlier EPFO rule, ‘A’ would have received a pension of Rs 3,857 (as per salary of Rs 15,000/month). But if if ‘A’ opted for EPS based on the higher salary amount of Rs 54,938, the pension would be Rs 14,127. Employees who want to get a higher pension amount would be required to transfer an additional amount from their EPF account to their EPS account. Therefore, the EPF corpus will be eroded due to the transfer from EPF to EPS. To exercise this option, a person needs to have sufficient balance in the EPF account. The deduction from his EPF account would be 8.33 per cent of his salary and interest thereof with retrospective effect.

ADVANTAGES TO EMPLOYEES

The employees who received heavy salary increments in the last stages of their career will benefit more in comparison to employees who get periodic increments, or low increments later in their careers.

Under the new rule, the portion of contribution to EPF from the employer’s contribution will go down, and the amount allocated to EPS will go up.

If you are looking to manage your pension income in retirement, then having a bigger corpus in the EPF would be more beneficial for you. However, if you are not skilled at money management, or think that your retirement corpus would be mismanaged if you receive it all at once, then it’s better to transfer fund to EPS and get an increased pension income after retirement.

There are many cases of misselling in which retired/retiring people are convinced against their interests to invest in low-quality investment products. But by investing in the new EPS such individuals can ensure a higher pension and protect their retirement fund from unscrupulous people.

But on the flip side, pension income is taxed. So if you fall in a higher tax bracket, you may want to avoid a higher pension option and look to invest the retirement corpus in other avenues like debt funds with a Systematic Withdrawal Plan, or small savings schemes such as the Senior Citizens' Savings Scheme. If you fall in a low tax bracket, you can explore the option of investing in EPS for a higher pension amount.

STEPS TO USE OPPORTUNITY

Further clarity is required on issues like eligibility for availing new EPS rule by the recently retired employees.  If you want to avail the benefit of the new rule and want to increase your pension corpus, you have to submit an application to the EPFO. The application must be submitted through your employer allowing EPFO to deduct 8.33% of your salary and transfer it to EPS along with interest thereof retrospectively till date while adjusting the due from the PF corpus.

— The writer is CEO, BankBazaar.com