Higher pension from EPFO: Here's why employer’s contribution to EPS will be 9.49% and not 8.33%

The Central Government on May 3, 2023, issued a notification citing the provisions of the Code on Social Security, 2020, requiring an additional allocation of 1.16 per cent of employer's contribution towards EPS for employees who choose to receive a higher pension.

Earlier, employees who chose to receive higher pensions were required by the EPFO to contribute an additional 1.16 per cent of their basic salary which exceeded the wage ceiling. The rule to pay 1.16 per cent from employees’ contributions was put in place by an EPFO amendment that took effect on September 1, 2014.  

It was later deemed invalid by the Supreme Court and EPFO was directed to develop a new mechanism to replace it. Now that the notification dated May 3, 2023 is in effect, the extra allocation will be recovered from the employer’s contribution and which shall continue till the date of retirement.

“For the employees, this means that now out of the employer’s contribution of 12 per cent of monthly pay to EPF, almost 9.49 per cent of such pay shall be allocated to the EPS, leaving only balance amount for the EPF. Consequently, this shall reduce the lump sum amount available on retirement,” said Sandeep Bajaj, Managing Partner, PSL Advocates & Solicitors.

Earlier, a proviso to Para 11(4) of the Employee Pension Scheme (EPS) had stated that members opting for higher pension would have to make an additional contribution of 1.16 per cent on wages exceeding Rs 15,000. “This specific provision was struck down by the Supreme Court because the framework of the EPF Act did not envisage any additional contributions from members. The EPFO was given 6 months to make adjustments and understand where the additional contribution would come in from,” said Sowmya Kumar, Partner, IndusLaw. 

To this end, the Labour Ministry has issued a notification stating that for members who opt for higher pension and whose application is accepted, the employer’s contribution to EPS shall be 9.49 per cent (i.e. 8.33% + 1.16 per cent). “Effectively, the additional contribution of 1.16 per cent on wages exceeding Rs 15000 shall come in from the 12 per cent overall employer contribution. Necessary adjustments will be made to the employees EPF account (i.e. the EPF corpus will reduce and the additional amounts will move to the EPS). This will be retrospective and will take effect from September 1, 2014,” said Sowmya Kumar, Partner, IndusLaw.

In a statement issued on Wednesday night, the ministry said the move will be retrospective in nature. "The spirit of the Employees’ Provident Fund & Miscellaneous Provisions Act as well as the Code on Social Security does not envisage contribution from the employees into the pension fund. Accordingly, keeping in mind the letter and spirit of the EPF & MP Act and the Code, it has been decided to draw 1.16 per cent additional contribution from within the overall 12 per cent of the contribution of the employers into the provident fund,” it said.