Pension Based on Actual PF Contributing Salary- Who will get the benefit of higher pension as per Supreme Court Verdict?

Yesterday, ie, on 1st April, 2019, the Supreme Court of India has pronounced a landmark judgement on Provident Fund Pension by holding the decision by the Hon. High Court of Kerala of October 2018 and rejecting the appeal by the Employees Provident Fund Organisation (EPFO). The verdict directs the EPFO to pay pension based on the actual salary of the member. There are a few points which require attention.

Background 

1. The Employees’ Pension Scheme 1995 provided for payment of 8.33% of the PF qualifying wages to the Pension Fund. The basic scheme  also provided that if the PF qualifying salary of any employee exceeds Rs 6500 the contribution payable to the Pension Fund could be restricted to Rs 6500. However, the Scheme was amended in 1996 which provided that if both the employee and the employer jointly agree, a higher amount equal to the amount contributed to Provident Fund could be contributed and, in such cases, that higher amount would qualify for pension calculation. Following this, many organisation (who later became parties to the case against the EPFO before the Kerala High Court) contributed to Pension Fund on higher salary. But the EPFO, with an administrative order, stopped this option with effect from 1st December 2004.  

2. In September 2014 when the PF threshold limit of wages was revised from Rs 6500 to Rs 15000, the contribution limit prescribed in the principal Scheme of Pension Fund was also revised from Rs 6500 to Rs 15000. Since a dispute was already in force about the higher contribution to pension fund and higher pension treating that as the pensionable salary, the EPFO restricted the Pension qualifying salary to Rs 15000 without any scope for the employer to pay contribution to pension fund on salary higher than Rs 15000. Moreover, the amended Scheme provided that the Pensionable Salary would be average of the 60 months’ salary. Owing to this many persons who retired in 2014 received Pension based on a maximum salary of Rs 6500 only. 

3. This was also challenged in the court. The Kerala High Court in October 2018 found that the order of the EPFO putting a cutoff date (1st December 2004) for giving option as unconstitutional. The court also scrapped the provision in the Act which limited the Pension Fund qualifying salary to Rs 15000. The High Court of Kerala viewed that when an employee is contributing to the Provident Fund on a salary higher than Rs 15000, he should be paid pension considering the same salary as the Pensionable Salary. 

4. The above order was challenged by the Employees Provident Fund Organisation before the Supreme Court of India. The Apex Court also found that a member of the EPF must be paid pension based on his actual contribution to the Provident Fund. The Court also directed that the pensionable salary should be the average of the salary for the preceding 12 months as against 60 months. The Court also upheld the decision of the Kerala High Court scrapping the provision in the Scheme which capped the pension fund qualifying salary to Rs 15000 and said that “the employees, who have been making contributions on the basis of their actual salaries after submitting a joint option with their employers as required by the Pension Scheme, are denied the benefits of their contributions by the said amendments without any justification. Apart from the above, to cap the salary at Rs. 15,000/- for quantifying pension is absolutely unrealistic. A monthly salary of Rs.15,000/- works out only to about Rs.500/- per day. It is common knowledge that, even a manual labourer is paid more than the said amounts as daily wages. Therefore, to limit the maximum salary at Rs.15,000/- for pension would deprive most of the employees of a decent pension in their old age. Since the pension scheme is intended to provide succour to the retired employees, the said object would be defeated by capping the salary."

Who will get the benefit? 

Really, the employees who are members of the Pension Fund Scheme of the Employees Provident Fund Organisation are overwhelmed by the verdict from the Supreme Court which upheld the decision of the  Kerala High. It gives them a relief that they are on the right track with regard to savings, investment and retirement planning. All the apprehensions spinned around the value of a 1000 rupees pension per month in 2030 or 2040 have gone. If this is the way in which pension will be calculated, then no one would think of investing in any other form of retirement plan. But things would not be so simple as many thinks. This is because many organisations take EPF as a STATUTORY BURDEN rather than a welfare scheme to their own employees.  It is true that for employees of an employer who  contributes his share of contribution without capping it at Rs 15000, but for an employee whose PF qualifying salary is limited to the mandatory amount of 12% of Rs 15000, there is nothing to cheer up. 

Those who contribute to PF on a salary higher than Rs 15000, say, Rs 50,000, that higher amount, ie, Rs 50000, will be the Pensionable Salary. Since the average pensionable salary for the 12 months preceding the date of retirement is the base salary for calculation of pension, he will get pension based on Rs 50000. At the same time, if his PF is capped to Rs 15000, only Rs 15000 will be taken as base for Pension calculation. In order to get higher pension, he should have contributed to PF on higher salary. Since the Pensionable salary is the average of 12 months’ pay preceding the date of retirement, any increase in PF contributing salary during this period would also benefit the employee.  

Is it possible to increase the PF contributing Salary? 

If the employer agrees that the contribution can be made on the actual salary, then there is nothing wrong in increasing the PF contributing salary. At the same time, neither the employee nor the EPFO can direct the employer to increase the PF contributing salary beyond Rs 15000. 

Will the verdict of Supreme Court on PF contribution on allowances help the employees to increase their PF and Pension qualifying salary?

It is true that PF is payable on allowances as well. The recent Supreme Court Verdict on contribution on allowances also substantiate that  allowances other than HRA will attract PF and as such your actual pay should be the base for PF contribution. But this does not apply in the case of salary above Rs 15000. The decision of Marathwada Gramin Bank Karmachari Sanghatana Vs Management of Marathwada Gramin Bank by the Supreme Court also says that EPFO cannot demand a contribution on a salary above Rs 15000. As such, it is entirely left to the employer whether to increase the PF contributing salary above Rs 15000 or not. 

It costs nothing to an employer if he decides to remove the capping of Rs 15000 from his payroll because whatever he contributes is accounted as part of remuneration in the present style of salary structure, viz, Cost To Company or CTC. Therefore, if he contributes more to PF it will be reflected in the CTC. At the same time the employees get the benefit of higher pension when they retire. As rightly observed by Justice Surendra Mohan and Justice AM Babu, you cannot get a labourer for Rs 500 per day then what is Rs 15000 all about? 

Madhu T K