EPFO Issues Revised FAQs on Adjusting Pension Arrears Against Higher Contribution Dues

Key Takeaways:

1. Pensioners applying for a higher EPS pension may have to pay additional dues to the EPFO to receive the higher pension.

2. The arrears of pension will be paid to the pensioners in accordance with the existing process to comply with income tax provisions relating to TDS.

3. Pensioners are eligible for arrears of the higher pension from their date of retirement.

4. The EPFO may either adjust the arrears against the demand of contributions on higher wages or carry out two separate transactions for payment of pension arrears and receipt of dues for higher EPS pension.

5. The EPFO’s recent FAQs provide some clarity on the process, but there may still be discretionary powers at the regional offices to decide on a case-by-case basis.

The Employees’ Provident Fund Organisation (EPFO) has issued revised FAQs on higher EPS pension on December 13, 2023. The newly added FAQ answers pensioners’ queries about whether their pension arrears due will be adjusted against higher contribution dues. A pensioner retired after September 1, 2014, is eligible to apply for a higher pension. Retirees waiting for the EPFO to clear their applications for higher pension under the Employees’ Pension Scheme (EPS) might have to deal with another tedious step before they can expect the higher pension to start.

The revised FAQ issued by the EPFO states that the additional dues pensioners would have to pay - necessary to get the higher pension under EPS - may not be adjusted against the pension arrears they would get from the EPFO. The FAQ clarifies that the arrears of pension will be paid to the pensioners in accordance with the existing process to comply with income tax provisions relating to TDS.

This means that pensioners have to pay some money (their additional contribution) to the EPFO before they can get the higher EPS pension. Those employees who have already retired would become eligible for arrears as they would be eligible for higher pension from their date of retirement. The amount that pensioners and EPFO will have to pay each other will become clearer only after the EPFO informs the pensioners of the final higher pension amount.

To make this clearer, let’s consider an example: An individual is eligible for a monthly pension after reaching 58 years in the EPS. Suppose you are a pensioner (i.e. already retired) who applied for the higher EPS pension in July 2023 and has to pay Rs 2.50 lakh as additional dues to get the higher pension. As pensioners are eligible for a higher pension from the date of retirement, the EPFO is liable to pay you arrears of the higher pension (difference between existing pension and the higher pension) from your date of retirement. If you were getting a pension of Rs 8,000 a month and the higher pension calculation makes you eligible to get Rs 25,000 a month, the EPFO will have to pay you arrears of Rs 17,000 a month from the date of retirement.

Now, let’s assume that the total pension arrears you have to get amount to Rs 3 lakh. As you have to pay EPFO Rs 2.5 lakh, the authority will either adjust the amounts against each other and give you the balance Rs 50,000, after TDS, or it can carry out two transactions - ask you to pay Rs 2.5 lakh for higher pension and pay you Rs 3 lakh after subtracting TDS.

Akhil Chandna, Partner, Grant Thornton Bharat, states that “As per EPFO’s recent FAQs, it has been clarified that the arrears of pension will be paid in line with the existing process for the calculation of pension, after the deduction of applicable taxes on such arrears (tax deducted at source or TDS). It may be inferred that the PF department can either adjust the arrears against the demand of contributions on higher wages or may make it a two-step process of (contribution) demand payment by the individual and separate payout of pension arrears post applicable TDS. The actual approach that the department will adopt in this regard is awaited.”

However, the FAQ could have had some more clarity. Sowmya Kumar, Partner, INDUSLAW, says, “The revised FAQs issued by EPFO try to answer pensioners’ query whether the pension arrears will be adjusted against any dues that they are liable to pay. The answer given by EPFO, however, does not provide complete clarity or address this issue on principle. It looks like the regional offices of the EPFO will have discretionary powers to decide this on an individual case-by-case basis.”

Puneet Gupta, Partner, EY India, has a different view: “The FAQ clarifies that where an individual is eligible for a higher monthly pension payout from the EPFO for the past period as arrears, such arrears of pension will be paid to the individual in accordance with the existing process. This will assist EPFO to comply with TDS requirement on such pension arrears payout. In my opinion, such pension arrears will not be adjusted against dues. The EPFO will undertake two separate transactions to pay the pension arrears and receive the dues for higher EPS pension.”

The EPFO issued the revised FAQs on December 13, 2023.

Pensioners Eligible to Apply for Higher Pension under EPS

A Supreme Court judgment dated November 4, 2022, has clarified that pensioners and eligible employees can apply for the higher EPS pension. According to the judgment, an employee who was a member of EPS on September 1, 2014, is eligible to apply for a higher pension. Hence, pensioners who were members of EPS on September 1, 2014, and retired after that are eligible to apply for a higher pension.

EPFO in a circular dated December 29, 2022, also clarified that if an employee had retired before September 1, 2014, and had not exercised the option to apply for a higher EPS pension, they were not eligible to apply for it anymore.

What is the Employees’ Pension Scheme of EPFO?

The Employees’ Pension Scheme or EPS is part of the Employee’s Provident Fund. An individual who was a member of EPF automatically became a member of the EPS too till August 31, 2014. But in September 2014, the law was amended to add a basic salary limit for joining the EPS. Now, an individual who is part of the EPF scheme also becomes part of the EPS provided their basic salary does not exceed Rs 15,000 a month.

EPS contribution is taken out of the employer’s contribution to the EPF. Out of the 12% of the basic pay that is the employer’s contribution, 8.67% is deposited into the EPS. However, the 8.67% is calculated on the wage ceiling limit (currently Rs 15,000). So Rs 1,250 (8.67% of Rs 15,000) is deposited every month in the EPS account from the employer’s contribution currently. The balance in the employer’s contribution is deposited into the employee’s EPF account.

Under the scheme, an individual is eligible for a monthly pension after reaching 58 years. The pension is calculated based on a formula specified by the EPF law.

FAQ

Q1: Will the arrears of pension be adjusted against the additional dues required for a higher EPS pension?

A1: The arrears of pension will be paid to the pensioners in accordance with the existing process to comply with income tax provisions relating to TDS. The EPFO may either adjust the arrears against the demand of contributions on higher wages or carry out two separate transactions for payment of pension arrears and receipt of dues for higher EPS pension.