The Higher Pension Scheme under the Employees’ Provident Fund Organization (EPFO) has been a subject of significant discussion, particularly after the Supreme Court’s ruling in November 2022 that allowed EPF members to opt for a higher pension by contributing higher amounts from their salary to the pension fund.
To determine whether employees should opt for the Higher Pension Scheme, here are key factors to consider:
1. Eligibility and Contribution Basis
Under the original scheme, employees and employers contribute to the Employees’ Pension Scheme (EPS) based on the Basic Salary up to a limit of ₹15,000 per month. However, if an employee wishes to opt for a higher pension, both the employee and the employer will need to contribute a higher portion of the salary to the EPS, which will be based on the actual salary rather than the ₹15,000 cap.
2. Supreme Court Ruling
The 2022 Supreme Court judgment allows employees who were members of the EPF before 2014 to opt for a higher pension, but they need to pay the additional contribution for the period they were part of the EPF scheme. The judgment primarily benefits those who were in the old scheme before the 2014 changes and have not yet opted for a higher pension.
3. Increased Pension
Opting for the Higher Pension Scheme means a larger monthly pension after retirement, as the pension is based on a higher average salary. This is attractive for those with long-term careers and high salaries, as it results in a bigger pension payout.
4. Potential Benefits
- Higher Monthly Pension: If you are closer to retirement and have contributed a significant amount over the years, opting for a higher pension can ensure a larger income post-retirement.
- Additional Benefits for High Salary Employees: Those with higher salaries, particularly in the ₹50,000-₹1,00,000 salary range, stand to benefit more as a higher contribution from both the employee and employer will lead to a substantially higher pension amount.
- Tax Advantages: Contributions to the EPF and EPS are tax-deductible, and the pension is also taxed at the time of withdrawal (depending on your total income at that time). The higher pension could be more advantageous tax-wise in the long term.
5. Considerations
However, there are some downsides and risks to consider:
- Backdated Contributions: If you opt for a higher pension, you may need to make backdated contributions for the period before the option was available, which could be a financial burden if you do not have the funds available.
- Employer’s Role: If your employer is unwilling to contribute the higher amount toward your pension, your decision to opt for a higher pension might be complicated.
- Financial Strain: If you are young and do not plan to retire soon, the additional contribution might affect your current take-home salary.
6. Complexity in Decision Making
The decision to opt for a higher pension is not simple. Several factors, including your age, salary, retirement goals, and financial position, should be taken into account. Those who are closer to retirement might gain more from the scheme, while younger employees may prefer to keep their current contributions.
7. Long-Term Security
In the long term, the Higher Pension Scheme can provide better security during retirement, especially as the pension payout could be significantly more than the standard EPF pension.
Should You Opt for It?
- Yes, if you have a long service period, a higher salary, and are planning for a higher pension post-retirement. It’s also beneficial if you’re nearing retirement and want to ensure a better pension.
- No, if you are early in your career and have a smaller salary base. The higher contributions now might not provide significant benefits in the long term, and the immediate loss in your take-home salary may not justify the future pension increase.
Conclusion
Opting for the Higher Pension Scheme can be a good idea for those who are in the latter stages of their career or those with a high salary. For younger employees or those looking for flexibility, it may be better to assess the option more cautiously based on personal finances and career plans. Consulting with a financial planner or pension expert is highly recommended before making a final decision.
