Pension will be higher under EPS but will come at a cost: Should you opt?

Be prepared to claw back from EPF to EPS if you go for joint option scheme

After the Employees’ Provident Fund Organisation’s (EPFO’s) recent circular, you may have received an email from your company’s Human Resource Department (HRD) enquiring if you wish to be part of the Joint Option Scheme. Assess the pros and cons carefully before making a decision.

What has happened?

The High Courts of Delhi, Rajasthan and Kerala had passed verdicts striking down the Employees’ Pension (Amendment) Scheme, 2014. In a November 2022 judgment, the Supreme Court (SC), however, upheld the amended scheme. 

“The apex court also extended the cut-off date to exercise the joint option under the EPS by four months for employees who could not exercise this option earlier,” says Sanjeev Kumar, partner, Luthra and Luthra Law Offices India.

Through its February 20, 2023 circular, the EPFO has opened the window for those who were in employment on September 1, 2014, and have continued thereafter, to choose a higher level of contribution to EPS if they want to. They need to inform their employer about their desire to contribute more by March 3, 2023.

What will change?

Until now, both the employer and the employee contributed 12 per cent of basic plus dearness allowance.Of the employer’s contribution, 8.33 per cent went to EPS and the rest 3.67 per cent to EPF. However, the contribution to EPS was capped at Rs 15,000 of basic salary.

For a person with a basic salary of Rs 100,000, 8.33 per cent contribution would be Rs 8,330.

However, the contribution that employers made to EPS was only Rs 1,250 (8.33 per cent of the capped amount of Rs 15,000).

With EPFO deciding to implement the SC judgment, employees can now avail of a higher pension. Henceforth, the employee contribution of 12 per cent will continue to go to EPF. 

The employer’s contribution to EPS will not be 8.33 per cent of the capped amount but 8.33 per cent of actual basic salary. The balance 3.67 per cent will continue to go to EPS.

Should you opt for it?

A higher pension has several positives. “With life spans increasing, a higher pension can be worthwhile. Besides, in a lower interest rate environment (which is likely over the long term), if you get a lump sum (as happens from the EPF corpus) it will be difficult to generate a high level of income,” says Arnav Pandya, founder, Moneyeduschool.

However, he adds that this move will carry a cost.

Financial planners say that some portion of the contribution already made by your employer to the EPF corpus will be clawed back and moved to EPS. 

“The deficit contribution to EPS, which had gone to EPF, will move to EPS along with the interest earned. The clawback will be from the time your job started,” says Deepesh Raghaw, a Securities and Exchange Board of India or Sebi-registered investment advisor and founder, PersonalFinancePlan.

Before opting for this scheme, also consider how EPS is calculated: (pensionable salary x pensionable years of service)/70. In other words, the amount of pension you earn does not depend only on your contribution but on your salary during the past 60 months. 

“If in the final five years, you decide to take it easy and pick a job that pays a lower salary, the pension you will end up with will also be lower,” says Raghaw.

If you decide to retire early, your years of pensionable service will be lesser. 

This will again affect the pension amount you get.

If the pensionable member (the employee covered by EPS) passes away early, the pension to the spouse will be 50 per cent of the pension paid when the employee was alive.

In the case of EPF, the corpus that you get on retirement will be the amount accumulated in your corpus. This amount is yours to invest as you want. 

The conditions attached to calculating EPS are not there in the case of EPF.