Government enhances employer's contribution to pension fund under the Code on Social Security

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Government enhances employer's contribution to pension fund under the Code on Social Security

Sudipto

@Sudipto

May 9, 2023

Public Policy

534

Overview

Immediately after the Government extended the May 03, 2023 deadline to exercise the option for higher pension benefits, the Government made effective specific sections of the Code on Social Security, 2020 (CSS) related to provident fund provisions. As a result of this change, the employer’s contribution towards Employees’ Pension Scheme – 1995 stands increased (from 8.33 % to 9.49 % of basic wages). As per the PIB public release dated May 03, 2023, this step has been taken to implement the directions of the Supreme Court in its 2022 order.

Chronology of events

2014: The Govt introduced an amendment to the EPS 1995 scheme. One of the amendments required that the members (employee) shall contribute @ 1.16 % of their basic wages/salary to the extent such basic wages/salary exceeds Rs.15000/per month as an additional contribution.

2022: The Supreme Court held this amendment to be ultra vires the provisions of the Employees Provident Fund and Miscellaneous Provisions Act. In the views of the Court, there is no statutory basis under which an employee can be made to make additional contribution to the pension fund. But the Court allowed its temporary operation for another 6 months.

The SC directed the Govt to adjust the EPS scheme so that the additional contribution can be generated from some other legitimate source within the scope of the Act. The SC suggested that adjustment could include enhancing the rate of contribution of the employers.

2023: Under the Code on Social Security, the Govt issued a notification (dated May 03, 2023 one day after the PIB release on extension of the EPS 95 deadline) that the employer instead of 8.33 % must contribute now 9.49% of basic wages/salary + DA + retaining allowance of each employee.

The Govt made effective few sections of the CSS to carry out this change w.e.f. May 01, 2023.

This notification has been issued with retrospective effect from September 01, 2014. As per PIB Press Release (last para) dated May 03, 2023 the retrospective operation in line with the directions given by the Supreme Court.

While the SC had only suggested that increasing employers’ contribution could be an option, as per the PIB Press Release, this change is in line with the Directions of the Supreme Court.

Why Code on Social Security, 2020 ?

Since the current Employees' Provident Fund Act does not allow employer's contribution to the EPS more than 8.33% of pay, the Central Government has implemented specific provisions of the CSS 2020 on 3 May 2023, which provides flexibility to the Central Government to decide the rate at which contributions can be allocated to the Pension Scheme.

Possible impact

This change can reduce the accumulated corpus under the EPF leading to reduced lump-sum amount available on retirement or specified events. Such reallocation of funds from the EPF to the EPS will be along with interest accrued in prior years.

For more information or queries on the above, please write to sudipto@nasscom.in, priyanshi@nasscom.in with a copy to policy@nasscom.in.

Code on social security pension fund EPS - 1995

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Sudipto