The Employees' Provident Funds & Miscellaneous Provisions Act builds a retirement corpus for its members. An employee contributes 12% of his salary towards EPF, and the employer matches this contribution. A part of the 12% which the employer pays to Employees' Provident Fund Organisation goes towards Employees' Pension Scheme or EPS.
Under Employees' Pension Scheme, 1995, the employer needs to contribute 8.33% of employee's salary into EPS. The Central Government shall also contribute at the rate of 1.16 per cent of the pay of the members of the Employees' Pension Scheme and credit the contribution to the Employees' Pension Fund provided that where the pay of the member exceeds fifteen thousand rupees per month the contribution payable by the employer and the Central Government be limited to the amount payable on his pay of fifteen thousand rupees only as per G.S.R. 609(E), dated 22.8.2014 (w.e.f. 1.9.2014). The Division Bench of Kerala High Court in 2019 LLR 558, has set aside this amendment. The Employees' Provident Fund Organisation filed SLP in the Supreme Court which was dismissed. Hence the Supreme Court has cleared the path for pension to rise manifold for its employees. But usually the employers' contribution is 8.33% of the maximum pensionable salary e.g. Rs. 15,000.
Effective from September 2014-15, EPS is applicable only to those who have a salary of less than Rs.15,000 at the time of joining the workforce and becoming a member of EPF. But those who have been part of the EPF system before that continue to have EPS. The 2014 circular was challenged and it is not yet clear if all the changes have been reversed.
After working for more than 10 years, members are eligible for EPS pension, which starts either at the age of 50 or 58 years, as per his choice. The one that starts at 50 is less than the other. If an employee has worked for less than 10 years, and is unemployed for more than two months, he can withdraw the EPS amount.
Back in March 1996, the EPS Act was amended to allow members to raise the Employees' Pension Scheme contribution to 8.33% of their full salary (basic + DA) - provided the employee and employer had no objection - thereby doing away with the cap on salary. This raised the pension amount exponentially. But in 2014, the EPFO again amended the Employees' Pension Scheme not only increase wage ceiling for coverage to the current cap but also introduced significant changes. To begin with, new employees having salary exceeding Rs. 15,000 per month were not eligible to become members of the EPS, while existing employees who were members of the EPS as on September 1, 2014, had an option to contribute on a higher salary. For this purpose, they needed to place a joint request along with their respective employers by a specific deadline. Moreover, now the pensionable salary would be calculated as the average of the last five years' monthly salary, and not of 12 months as per earlier norms, which was responsible for reducing the pension of many employees.
In R.C. Gupta & Ors., etc. etc. vs. Regional Provident Fund Commissioner & Ors., 2017 LLR 866 the Supreme Court ruled that under clause 11(3) of the Pension Scheme, the maximum pensionable salary was limited to Rs. 5000/- and later on enhanced to Rs. 6,500/- proviso to clause 11(3) permitted an option to employer and employee for contribution on salary exceeding the limit. 8.33% of the contribution on actual salary remitted to Pension Fund. At the eve of retirement the employees claimed benefit on the basis of actual contributions. The EPF Authority denied the same and limited it to prescribed limits. The employees filed writ petition challenging the order of the EPF Authority which was allowed by the Learned Single Judge. Division Bench reversed the order of the Learned Single Judge. Employees filed appeal challenging the order of the Division Bench. It has been held by the Court that proviso to Clause 11(3) is not having any cut-off date to determine the eligibility of employer-employee to indicate their option. The Pension Scheme is a beneficial to the employees. The exercise of the option under Paragraph 26(6) of Employees' Provident Scheme would not foreclose the exercise of further option under clause 11(3) of the Scheme unless the circumstances warranting such foreclosure are clearly indicated. Hence, the employees would be entitled to benefit of deposit of 8.33% of their actual salary/contributions in Pension Fund irrespective of the ceiling limit. Order of the Division Bench is set aside and that of the Learned Single Judge is confirmed. The Apex Court also allowed those who hadn't made higher contributions to the EPS on a monthly basis to exercise the option by making lump-sum deposits of the differential amount due (the difference between EPS contribution they made while in service and the contribution they would have made had it been pegged to their full salary). But the EPFO had been dragging its feet on the implementation of the order, perhaps deterred by the sheer volume of demands raised. Then, last year, the Kerala High Court set aside the 2014 amendment calling it arbitrary and unsustainable and reinstated the old system of calculating the pensionable salary as the average of the last one year's monthly salary.
The Act provides for the formulation of a Scheme for the creation of a Provident Fund Account in the name of each employee of a covered establishment. The fund was to be constituted by depositing an employee's share at the rate of 12% of the basic wages including dearness allowance. The employer has also to contribute an identical amount, which together would constitute the provident fund. Initially, the Act did not provide for the creation of a Pension Fund or for the payment of pension. Later on, Section 6A was inserted, authorizing the creation of a scheme for the purpose of providing pension to the employees. Accordingly, the Employees' Pension Scheme, 1995 was framed.
In the above circumstances, the Pension Scheme was amended with effect from 01.09.2014. The pensionable salary was altered to mean the average monthly pay drawn in any manner, including on piece-rate basis, during the contributory period of service comprising of a span of sixty months preceding the date of exit from the membership of the pension fund.
The High Court said that the intention of Parliament in framing the PF Scheme was to secure the rights of the lower wage earners. The said object was being defeated by the action of the employees paying contributions above the ceiling limit. The situation created was one of reverse subsidization. It has also disturbed the fund base of the scheme which in turn was found to affect the rights of the lower wage income group who receive a pension. It was in order to safeguard the interests of the said lower income group that the amendments were brought into force.
The division bench of the High Court further said that 'we have considered the respective contentions advanced by the counsel on either side anxiously. In many of the cases before us, the validity of the amendments made to the pension scheme is under challenge. The Pension Scheme is made under section 6A of the EPF Act. The industrial revolution that brought about drastic changes in the structure of our society created a large and distinct section of people, the industrial workers. The large industrial establishments that started springing up all around, required the services of workers of various categories. They came in large numbers from the rural areas in search of better salaries, better living conditions and better career prospects. They settled down close to the industries spurring the growth of urban settlements, that later developed into our cities. Such workers, when they became old and infirm were found to be left with no income or means of sustenance. In view of the obligation in the Directive Principles, to ensure social justice to one and all, the State had to find some means to ameliorate the conditions of the old and infirm industrial workers.
It cannot be disputed that the workforce in our country has only been growing in numbers with more and more establishments springing into existence and getting covered by the provisions of the EPF Act. The contributions paid by them on the basis of the actual salaries drawn by the employees are constantly adding to the base of the fund. Such a process of accretion is a continuing phenomenon. Therefore, there is no evidence of the fact that the fund is getting depleted by the payment of pension, as alleged. At the same time, statistics only prove otherwise. It is commonly accepted that the fund base has only grown over the years by the accumulation of EPF contributions.
India is a country with a large number of people living on the margins of subsistence, compared to whom an organised sector worker, even if lowly paid in relation to corporate executives or civil servants, is relatively well off. The courts have together created a situation in which the judiciary, rather than the legislature or the executive, decides how government funds should be spent, and, further, insists that the money should be spent on the relatively better off sections of society, without regard to the likelihood of there being more deserving recipients of such funds or of society deriving greater collective benefit from any additional funds available with the government being spent on healthcare, education or women's empowerment, all of which have been identified as yielding high social returns.
There is another side of it that what proportion of an employee's earnings should mandatorily be saved is an issue for rational analysis, not arbitrary court orders. No employer is going to rise what it costs the company to hire a hand, merely because a larger proportion of that cost is mandated to be saved. All that will happen is that the take-home pay would dip. Whether an employee, at low levels of earning, would be better off by depressing current consumption to save for the future is for the employee to decide.