- Date : 05/04/2019
- Read: 3 mins
The contribution will now be calculated basis the full salary an employee draws. Know more.
Private sector employees nearing retirement have good news coming their way. The Supreme Court (SC) dismissed a special leave petition filed by the Employees Provident Fund Organisation (EPFO) to cap the pension receivable for all retiring employees.
What was the concern?
The plea was filed against a previous judgement at the Kerala High Court. It sought to limit the calculation of contribution towards pension by capping the amount to a maximum of Rs 15,000 per month.
The SC upheld the decision stating, "We find no merit in the special leave petition. The same is, accordingly dismissed.” With the SC’s nod, the contribution now will be calculated basis the full salary an employee draws.
Related: Retirement planning for pros: National Pension Scheme
How EPS evolved?
The government had introduced the Employee Pension Scheme (EPS) in 1995. Under the scheme, the employer was supposed to make a contribution of 8.33% of the employee’s salary towards a pension scheme. The contribution was, however, capped on a maximum of Rs 6,500. Enabling a maximum contribution of Rs 541 per month (8.33% of 6500). In March 1996, the Government amended the Act, allowing the contribution to be calculated as a percentage of the actual salary as long as both the employer and employee did not have an objection.
In September 2014, the EPFO raised the ceiling for contribution to Rs 15,000 taking the monthly contribution to a maximum of Rs 1,250 (8.33% of 15,000). The amendment by the EPFO also stated that those availing of pension benefit on full salary would have their pensionable salary calculated as an average of the last five years and not just the previous one year as per the earlier norm. This significantly reduced the pension of many employees.
The Kerala High Court subsequently re-instated the old system of calculating pensionable income basis the average of the last one year’s salary and in October, the same year the SC directed the EPFO to consider employees request to calculate the contribution to pension basis backdated calculation of full salary. The benefit of pension on full salary will also be available to employees who started working after the September 2014 judgement.
Related: What is National Pension System and how it works
What the verdict means?
This order offers a significant uptick in pension income for many retirees, in some instances ranging from a 300% to 1200% jump in pension. The only shortcoming to this ruling is that with the increase in pension, the provident fund corpus may take a hit as the additional contribution will be diverted towards EPS instead of the PF. However, the change in amount is not liable to be significant considering the commutation part of the increased pension should be more than sufficient to bridge the gap
Related: Alternative sources of income if you don’t have a pension
It was noted that despite the SC judgement, EPFO refused to accept contributions of employees whose pension were managed by trusts. These included large PSU Navratna entities such as ONGC, IOC, and other large private sector organisations that are managed basis guidelines set by the EPFO.
In addition to the Kerala High Court, many other High Courts such as Madras, Andhra Pradesh and Rajasthan amongst others ruled in favour of employees asking EPFO to allow them to make contributions basis the full salary.
The latest April 2019 ruling by the SC in favour of hard-working citizens is expected to resolve this issue once and for all. Understand these types of pension plans and their tax benefits.
Private sector employees nearing retirement have good news coming their way. The Supreme Court (SC) dismissed a special leave petition filed by the Employees Provident Fund Organisation (EPFO) to cap the pension receivable for all retiring employees.
What was the concern?
The plea was filed against a previous judgement at the Kerala High Court. It sought to limit the calculation of contribution towards pension by capping the amount to a maximum of Rs 15,000 per month.
The SC upheld the decision stating, "We find no merit in the special leave petition. The same is, accordingly dismissed.” With the SC’s nod, the contribution now will be calculated basis the full salary an employee draws.
Related: Retirement planning for pros: National Pension Scheme
How EPS evolved?
The government had introduced the Employee Pension Scheme (EPS) in 1995. Under the scheme, the employer was supposed to make a contribution of 8.33% of the employee’s salary towards a pension scheme. The contribution was, however, capped on a maximum of Rs 6,500. Enabling a maximum contribution of Rs 541 per month (8.33% of 6500). In March 1996, the Government amended the Act, allowing the contribution to be calculated as a percentage of the actual salary as long as both the employer and employee did not have an objection.
In September 2014, the EPFO raised the ceiling for contribution to Rs 15,000 taking the monthly contribution to a maximum of Rs 1,250 (8.33% of 15,000). The amendment by the EPFO also stated that those availing of pension benefit on full salary would have their pensionable salary calculated as an average of the last five years and not just the previous one year as per the earlier norm. This significantly reduced the pension of many employees.
The Kerala High Court subsequently re-instated the old system of calculating pensionable income basis the average of the last one year’s salary and in October, the same year the SC directed the EPFO to consider employees request to calculate the contribution to pension basis backdated calculation of full salary. The benefit of pension on full salary will also be available to employees who started working after the September 2014 judgement.
Related: What is National Pension System and how it works
What the verdict means?
This order offers a significant uptick in pension income for many retirees, in some instances ranging from a 300% to 1200% jump in pension. The only shortcoming to this ruling is that with the increase in pension, the provident fund corpus may take a hit as the additional contribution will be diverted towards EPS instead of the PF. However, the change in amount is not liable to be significant considering the commutation part of the increased pension should be more than sufficient to bridge the gap
Related: Alternative sources of income if you don’t have a pension
It was noted that despite the SC judgement, EPFO refused to accept contributions of employees whose pension were managed by trusts. These included large PSU Navratna entities such as ONGC, IOC, and other large private sector organisations that are managed basis guidelines set by the EPFO.
In addition to the Kerala High Court, many other High Courts such as Madras, Andhra Pradesh and Rajasthan amongst others ruled in favour of employees asking EPFO to allow them to make contributions basis the full salary.
The latest April 2019 ruling by the SC in favour of hard-working citizens is expected to resolve this issue once and for all. Understand these types of pension plans and their tax benefits.
