How to increase your pension

In a major relief to thousands of employees, the Supreme Court recently dismissed the Special Leave Petition filed by the Employees’ Provident Fund Organisation (EPFO) against a Kerala High Court judgement setting aside Employee’s Pension (Amendment) Scheme, 2014 that had capped the maximum pensionable salary to Rs 15,000 per month. The bench comprising Chief Justice of India, Justice Ranjan Gogoi, Justice Deepak Gupta, and Justice Sanjiv Khanna on April 1, 2019 while dismissing the special leave petition (SLP) observed, “We find no merit in the special leave petition. The same is, accordingly, dismissed.”

Just to understand the crux of the issue, the government in consultation with EPFO had in 2014, issued a notification No. GSR 609(E), which stated that from September 1, 2014, the monthly pensionable wage ceiling for the Employees’ Pension Scheme 1995 was enhanced from Rs 6,500 to Rs 15,000.

The mode of calculating the average pensionable wage was also changed. In December 2018, the Kerala High Court had quashed this Notification No. GSR 609(E) and had set aside the various orders and proceedings related to that notification.

The division bench at Kerala High court comprising Justice Surendra Mohan and Justice AM Babu had observed: “The employees, who have been making contributions on the basis of their actual salaries after submitting a joint option with their employers as required by the Pension Scheme, are denied the benefits of their contributions by the said amendments without any justification. Apart from the above, to cap the salary at Rs 15,000 for quantifying pension is unrealistic. A monthly salary of Rs 15,000 works out only to about Rs 500 per day.

It is common knowledge that, even a manual labourer is paid more than the said amounts as daily wages. Therefore, to limit the maximum salary at Rs 15,000 for pension would deprive most of the employees of a decent pension in their old age. Since the pension scheme is intended to provide succour to the retired employees, the said object would be defeated by capping the salary.”

In response, EPFO had filed a special leave petition against the said Kerala High Court Order in the Supreme Court, which the Bench has dismissed.

How does the Employee Pension scheme (EPS) work?

All of us know that 12% of our Basic Salary goes towards Employee Provident Fund (EPF).Though many of us also know that the employer makes a matching contribution we have hardly understood what happens to the Employer’s contribution of 12%.

When an employee joins an establishment covered under the EPF Act, 1952, he/she simultaneously becomes a member of Employees Provident Fund Scheme (EPF), Employees’ Pension Scheme (EPS) 1995, Employees Deposit Linked Insurance Scheme (EDLIS), 1976.

The table above illustrates how the entire EPF/EPS works.

While 12% of your contribution (12% of the Basic Salary) goes in to the EPF, out of the 12% employer’s contribution, 3.67% goes in to EPF and the remaining 8.33% goes in to EPS (Employee Pension Scheme, 1995) subject to a maximum of Rs 1,250.

In other words, the employer contributes lower of either 8.33% or Rs 1,250. So the maximum contribution that the Employer makes to the EPS is capped at Rs 1,250 per month!

An individual drawing a salary of Rs 50,000 at retirement, and having worked for 34 years and 8 months, would get pension as follows. (The fraction of service of six months or more shall be treated as one year and the service less than six months shall be ignored): Average salary for the last 15 years or Rs 15,000, whichever is lower x Number of completed years of service divided by 70.

So Pension = 15,000 (Being the lower of the two Rs 50,000 or Rs 15,000) x 35/70 - which would be Rs 7,500.

What the Supreme Court has done is to remove the ceiling of Rs 15,000. So, the pension will be equal to the last drawn salary multiplied by the number of years of service divided by 70. The individual will now get pension as follows:

= 50,000 x 35/70, which would be Rs 25,000.

In other words, employees covered by EPF will now be eligible for pension as per their full last drawn salaries. 

However, the catch is, to get this higher pension, you will have to deposit more in the EPS to make up for the shortfall in the previous years. If you want a higher pension, you will have to divert this amount from your EPF corpus to the EPS.

The cruel part is unlike the EPF portion, EPS portion does not earn any interest.

(The writer is a former Banker and currently working with Manipal Academy of Banking, Bengaluru)