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Recently, the Supreme Court rejected a petition filed against a decision by the Kerala High Court on the quantum of pension payable under Employee Pension Scheme (EPS) 1995. The Employees Provident Fund Organisation (EPFO) had filed a petition against the Kerala High Court decision. If the Supreme Court decision is implemented, the pension paybale to employees of the private could be enhanced manyfold.

Let us understand the provisions of EPS 1995 and implications of the Supreme Court decision.

Provisions of EPS

The Employee Pension Scheme was introduced in 1995 to give pension to private sector employees, their widows and nominees. This scheme was introduced under the provisions of Provident Fund Act, 1952. Under the provident fund scheme employer is required to deduct 12% of the eligible salary of employee and is also required to match equal amount. As per the EPS, 1995, out of the employer’s 12% contribution, 8.33% is transferred to the employee’s pension account. The amount to be transferred to the pension account was initially fixed at Rs 6,500. It was later increased to Rs 15,000. So though the provident fund contribution might have been made at higher basic salary, the amount to be transferred to the employee’s pension account would be restricted with reference to Rs 15,000. The balance (3.67% of Rs 15,000 and 12% over 15,000) would remain in the employee’s provident fund account.

How EPS works

Pension for the employee starts at 58 years of age. An employee becomes entitled to pension only if he has rendered completed services for 10 years, failing which he is entitled to withdraw the amount in his EPS account.

For the purpose of computation of pension, maximum of 35 years of service are considered even if the actual years of services are higher. Likewise, an employee is entitled to a minimum of Rs 1,000 and maximum of Rs 7,500 as pension under EPS.

The pension is computed under a formula (number of completed years of services+2)*(Rs 15,000 or the average pensionable salary if it is less than Rs 15,000)/70. The bonus of two years will not be added to the completed years of service if the total completed years of service is less than 20 years.

While arriving at completed years of services, any period of six months or more is taken as full year. So the pension is computed with reference to maximum of Rs 15,000 of salary, irrespective of the amount of basic salary on which contribution towards PF was made. The average salary is computed with reference to salary drawn during previous five years.

Kerala High Court decision

The Kerala High court had held that pension should be computed with reference to the actual salary considered for the purpose of PF deduction and should not be restricted to Rs 15,000. This has been subsequently upheld by Supreme Court.

For example, let us assume a person’s basic salary is Rs 1 lakh. He and his employer have opted not to restrict their PF contribution to 15,000 (which is permissible) and have been contributing to the PF on such higher salary. In such a case employer would have deducted as well as contributed Rs 12,000 toward PF, but only 8.33% of Rs 15,000, that is, Rs 1,250 would have gone to his EPS account and not 8.33% of Rs 1 lakh, that is, Rs 8,333 the entire amount to be considered for EPF contribution.

The Kerala High Court also said that the EPS scheme should compute the average salary with reference to average salary of last one year and not five years. As average salary computed with reference to latest lower number of years is going to be higher than if computed with reference to higher numbers, this too would result in higher pension for employee. The Kerala High court has also held that the EFPO can not recover anything beyond 12% as prescribed under the EPF.

Impact of the Supreme Court order

The Supreme Court decision has opened a Pandora’s Box. The decision if implemented as it is will substantially increase the pension of employees as well as ex-employees, their widows and nominees. Is it possible for the EFPO to service so enhanced pensions for such a large number of people? I do not think EFPO can provide for this unless the government comes to its rescue.

In order to ensure that the pension of employees who are still employed, the differential amount of contribution of EPS may be made from their PF account. But what about the recovery from employees who have retired and have withdrawn the entire balance in their PF accounts?

In case of employees who have changed jobs during the career, some employers would have contributed pension on the entire salary on which PF is contributed, whereas others would have contributed on the basis of the minimum amount of Rs 15,000. In such a situation an employee who retires with higher contribution will be beneficially placed against a person whose contribution based on Rs 15,000 at the time of his retirement.

As the Kerala High Court has restored the basis of 12 months salary for computation of salary, it could also become open to manipulation. The pensionable salary may see substantial increase in the last year of the employment so as to entitle the employee who is superannuating soon, for higher pension without the employer losing anything.

COURT’S ORDER

  • The Kerala High Court had said, and the Supreme Court subsequently upheld, that pension of private sector employees should be computed on average salary and not restricted to Rs 15,000 as capped under EPS   
  • The Kerala High Court also said that the EPS scheme should compute the average salary with reference to average salary of last one year and not five years.

The writer is a tax and investment

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