Nearly two weeks before the deadline to opt for a higher pension scheme was to expire on March 3, pension fund body EPFO released a circular on Feb 20 explaining the process of doing so.
The last date, thereafter, was pushed by another two months to May 3.
Now, the pension fund subscribers are expected to fill up a joint option to the concerned regional office indicating their desire of opting for a higher pension.
But before we proceed, we will explain what exactly are these rules.
Following a Supreme Court order on November 4, 2022, the Employees’ Pension Fund Organisation (EPFO) permitted the subscribers to choose higher pension after retirement by opting for 8.33 percent contribution of their actual salary.
Earlier, this contribution (8.33%) was made on pensionable salary (basic and dearness allowance) and was capped at ₹15,000.
With the cap of ₹15,000 removed, the subscribers will now be eligible to seek a higher pension by choosing 8.33 percent of their “actual” salary and not the pensionable salary.
How it happens?
The EPFO subscribers are meant to contribute 12 percent of their pensionable salary towards EPF. At the same time, 12 percent contribution is made by the employer as well. But 8.33 percent of this 12 percent goes towards the EPS in case of eligible employees and the remaining 3.67 percent goes towards the EPF.
The change that has now been introduced pertains to 8.33 percent i.e., the portion of employer’s contribution.
Now in case you are wracking your brains over which path to choose, we are here to help you deconstruct this.
Here we peel off the layers to apprise you of what would happen if you opt for the higher pension.
Points to remember before opting for a higher pension:
1. In place of lumpsum: At the outset, you must be aware of the fact that higher pension will be given at the expense of lumpsum amount. So, it ought to be chosen only when you want a higher pension after retirement instead of a higher lumpsum.
2. Taxable vs tax-free: It is also worth noting that the pension amount would be taxable while the provident fund’s lumpsum amount is tax-free. So, in case you have other sources of income and your tax bracket is higher, then this pension amount will reduce on account of tax.
3. In case of death: When the EPF subscriber dies, the legal heir and nominee are entitled to receive only 50 percent of eligible pension which the subscriber was supposed to receive. So, in case the subscriber happens to die early then the family will stand to lose a lot of money vis-à-vis the other alternative of higher lumpsum.
4. About eligibility: It is worth mentioning here that the pension benefits are given only to subscribers after they spend at least 10 years in the service and after they retire at the age of 58. So, those subscribers who are looking for an early retirement may not be advised to opt for the higher pension scheme.
Aside from these apprehensions, there is a lack of clarity over a range of things. For instance, EPS contribution also gets 1.16 percent from the government.
Now whether the government will contribute this sum towards the EPS is yet to be answered. And if the government refuses to do it in the wake of change of rules, who else will fill in for this? Subscribers or someone else? It has yet to be clarified.