By: HUB’s EB Global Benefits Team

Companies are required to contribute 12% of their salary to the Employees’ Provident Fund Organization (EPFO) for employees whose monthly salary does not exceed INR 15,000. Employees with salaries below this cap are also required to contribute 12% of their salary. The entirety of an employee’s contribution is credited to the Employees’ Pension Fund (or EPF, a defined contribution program with individual accounts). Of the employer contribution, 8.33% of pay is allocated to the Employees’ Pension Scheme (or EPS, a separate defined benefit program), and the remaining 3.67% of pay is allocated to the employee’s EPF account.

Employees and employers could agree to contribute based on uncapped pay for both the EPF and the EPS programs, but changes introduced by the EPFO in 2014 eliminated this option for new EPS entrants.

Furthermore, for those employees that were contributing based on uncapped pay in August 2014, the portion of the employer contributions allocated to the EPS was calculated based on the INR15,000 monthly salary cap, with the excess contributions going to the EPF account.

This position was challenged in court. After a process of appeals, the Supreme Court ruled in November 2022 that employees who were in service on or before September 1, 2014, and who had elected to contribute based on total pay, may elect to have their Employees’ Pension Scheme (EPS) benefits calculated based on total salary. A deadline of July 11, 2023, has been set for application to offer the option through a labor-intensive process for the employee and employer.

Eligible employees will have to make this election through their employer and provide pay slips to support their case for the covered period. Each employee (or retiree) eligible to use the option must assess the merits based on their individual circumstances.

If employees choose the option, the difference in contributions allocated to the EPS based on total pay vs. those posted to the EPS must be made up for. For active employees, restitution could be made from their EPF account balance.

Other more important effects from the ruling are:

  • EPS will remain closed to individuals who have never participated in the EPS, and whose earnings have been over the cap.
  • A requirement of an additional contribution of 1.16% of pay, introduced in 2014 for those making contributions based on uncapped pay has been eliminated.

How this impacts you

  • Employers have the responsibility to communicate their affected employees’ elections to the Employees’ Provident Fund Organization (EPFO) and to provide documentary support.
  • Employees who make positive elections will see a portion of their retirement benefit expectations switched from a lump sum to a lifetime annuity.
  • Employers should expect additional regulation in EPFO benefits and contributions, especially in the possibility of transfer of funds from the EPS to the National Pension System (NPS)

Next steps

  • Identify the employees eligible to make this election and communicate their options, deadlines and process.
  • Stand by ready to support employees with the necessary documentation required for their application for retroactive calculation of EPS contribution allocation.
  • Revisit the design of their company pension arrangements, particularly the feature of voluntary contributions to the EPFO based on uncapped pay.

If you have any questions, please contact your HUB Advisor. View more updates in our Global Benefits Directory.