EPFO: Is the Higher Pension Plan Scheme Actually Good for Employees?

Update on the recent higher pension scheme declared by EPFO

pension scheme declared by EPFO

Employees seeking a higher pension can now submit a joint declaration with the employer. The Employees’ Provident Fund Organisation (EPFO) has defined the process of applying for a higher pension under the Employee Pension Scheme (EPS). Notably, in November last year, the Supreme Court instructed the EPFO to make the higher pension option available to member employees.

Also Read: Why retirement plans fail? 5 common mistakes to avoid

Pension Calculation 

To calculate the pension, the pensionable salary must be multiplied by the pensionable service years and then divided by 70. Before the notification issued on 22 August 2014, the pensionable salary was simply the average salary of the last 12 months. With the notification, this definition was changed to “average salary of 60 months”. Although the change was challenged, the Supreme Court upheld the EPFO’s notification. 

A person with a minimum of ten years of contributory service is eligible for a pension.

Also Read: New PFRDA rules announced to withdraw under NPS partially. Check eligibility and how to apply

The Higher Pension Scenario

There are various factors and effects related to the higher pension plan scenario. 

With the change in regulation, if the subscriber’s salary increased in the last 12 months, the subscriber’s pensionable wage would be lower. In the reverse scenario, the pensionable salary would be high if there was a reduction in pay during the last 12 months. Once you choose a higher pension, your past contribution and interest will be added to the EPS, while your accumulated PF balance will get reduced.

Once you choose a higher pension, your past contribution and interest will be added to the EPS, while your accumulated PF balance will get reduced.

A higher pension increases the tax liability in the hands of the pensioner. This is because the pension is taxable while PF is more tax-friendly. If you have contributed to PF for over five years, any withdrawal from PF accumulated balance is exempt from income tax. 

After withdrawing from PF, a person can invest in various annuity plans. However, one may opt for the higher pension income instead because of EPS's sovereign backing.

Also Read: How much should you withdraw from a retirement fund to make it last long enough

Key Takeaways

  • The pension is available to all employees who have been contributing towards EPF,

  • Employees contributing to EPS but didn’t trigger the joint option for a higher pension on their actual salary before 1 September 2014 can apply for the higher pension now. The last date for exercising the joint option was 3 March 2023,

  • Besides, those who have given joint consent to the EPFO for the PF to EPS fund adjustment can receive a higher pension,

  • With this change, employees can contribute up to 8.33% of their actual basic salaries towards pension.

There are various aspects related to pension rules. Will the government continue with the 1.16% contribution, the terms of reference of maturity, inflation-pension relation etc.? This will help the employee build a more considerable pension corpus. On the other hand, for those who struggle to save for retirement planning, this will reduce their salary. 

Source: 

Employees seeking a higher pension can now submit a joint declaration with the employer. The Employees’ Provident Fund Organisation (EPFO) has defined the process of applying for a higher pension under the Employee Pension Scheme (EPS). Notably, in November last year, the Supreme Court instructed the EPFO to make the higher pension option available to member employees.

Also Read: Why retirement plans fail? 5 common mistakes to avoid

Pension Calculation 

To calculate the pension, the pensionable salary must be multiplied by the pensionable service years and then divided by 70. Before the notification issued on 22 August 2014, the pensionable salary was simply the average salary of the last 12 months. With the notification, this definition was changed to “average salary of 60 months”. Although the change was challenged, the Supreme Court upheld the EPFO’s notification. 

A person with a minimum of ten years of contributory service is eligible for a pension.

Also Read: New PFRDA rules announced to withdraw under NPS partially. Check eligibility and how to apply

The Higher Pension Scenario

There are various factors and effects related to the higher pension plan scenario. 

With the change in regulation, if the subscriber’s salary increased in the last 12 months, the subscriber’s pensionable wage would be lower. In the reverse scenario, the pensionable salary would be high if there was a reduction in pay during the last 12 months. Once you choose a higher pension, your past contribution and interest will be added to the EPS, while your accumulated PF balance will get reduced.

Once you choose a higher pension, your past contribution and interest will be added to the EPS, while your accumulated PF balance will get reduced.

A higher pension increases the tax liability in the hands of the pensioner. This is because the pension is taxable while PF is more tax-friendly. If you have contributed to PF for over five years, any withdrawal from PF accumulated balance is exempt from income tax. 

After withdrawing from PF, a person can invest in various annuity plans. However, one may opt for the higher pension income instead because of EPS's sovereign backing.

Also Read: How much should you withdraw from a retirement fund to make it last long enough

Key Takeaways

  • The pension is available to all employees who have been contributing towards EPF,

  • Employees contributing to EPS but didn’t trigger the joint option for a higher pension on their actual salary before 1 September 2014 can apply for the higher pension now. The last date for exercising the joint option was 3 March 2023,

  • Besides, those who have given joint consent to the EPFO for the PF to EPS fund adjustment can receive a higher pension,

  • With this change, employees can contribute up to 8.33% of their actual basic salaries towards pension.

There are various aspects related to pension rules. Will the government continue with the 1.16% contribution, the terms of reference of maturity, inflation-pension relation etc.? This will help the employee build a more considerable pension corpus. On the other hand, for those who struggle to save for retirement planning, this will reduce their salary. 

Source: 

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