Implementation of specific provisions of the Code on Social Security, 2020 for higher pension option under the Employees' Pension Scheme

As per notifications issued by the Ministry of Labour and Employment on 3 May 2023, for an employee who opts for higher pension, the following amounts will be allocated out of employer’s share of monthly Provident Fund contributions towards the Pension Scheme:

a. 8.33% of basic wages, dearness allowance and retaining allowance; plus

b. 1.16% of basic wages, dearness allowance and retaining allowance exceeding INR 15,000 per month

This would mean that for an employee opting for higher pension - out of employer’s contribution of 12% of monthly pay, almost 9.49% of pay will be allocated to the Pension Scheme and balance will be allocated to the Provident Fund Scheme. 

This change is retrospective from 1 September 2014.

For details on the higher pension option, the Supreme Court ruling of 4 November 2022 and the EPFO circular of 20 February 2023, please refer to our previous alert dated 21 February 2023 – please click here. 

For details on the online application form for higher pension released by the EPFO – please click here.

Comments

Effective 1 September 2014, as per an amendment to the Pension Scheme, for an employee opting for higher pension – 1.16% of pay exceeding INR15,000 per month was required to be allocated out of employee’s share of Provident Fund contribution towards the Pension Scheme.

The Supreme Court in its ruling dated 4 November 2022 on higher pension matter held that such allocation of 1.16% of pay exceeding INR 15,000 per month from the employee’s share of Provident Fund contribution into the Pension Scheme is ultra-vires the provisions of the Provident Fund Act. However, as a stop-gap measure, the Supreme Court allowed such allocation out of employee’s share of Provident Fund contribution to continue for a period of 6 months from the date of ruling or till such time amendment is made in the scheme (whichever is earlier). The Supreme Court suggested that the authorities may make adjustment to the scheme provisions such that the additional contribution can be generated from some other legitimate source within the scope of the Provident Fund Act which could include enhancing the rate of contribution of the employers. 

As the current Provident Fund Act does not allow employer’s contribution to the Pension Scheme in excess of 8.33% of pay, the Central Government has invoked specific provisions of the Code on Social Security 2020 on 3 May 2023, which provide for flexibility to the Central Government to decide the rate at which contributions can be allocated to the Pension Scheme. In exercise of such powers under the Code on Social Security, 2020, the Government has now notified an increased rate of contribution from the employer’s share of Provident Fund contributions into the Pension Scheme when an employee opts for higher pension.

Employees will need to analyze the cost-benefit impact of higher pension option on the lump-sum withdrawal benefit available under the Provident Fund Scheme and monthly pension available under the Pension Scheme. Higher allocation of contribution to the Pension Scheme may reduce the accumulated corpus under the Provident Fund Scheme leading to reduced lump-sum amount available on retirement or specified events albeit higher monthly pension.