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India: Retirement developments enhance NPS tax break, reinstate employee/employer option to participate in EPS and include certain allowances in pay subject to EPF contributions


April 26, 2019

Recent Indian legislation and court rulings regarding the NPS and the EPS present retirement benefit planning opportunities for employees and employers.


Recent legislation and court rulings regarding the National Pension System (NPS) and the Employees’ Pension Scheme (EPS) present retirement benefit planning opportunities for employees and employers. Additional developments include a Supreme Court ruling on the treatment of allowances for Employees’ Provident Fund (EPF) contribution purposes, and an announcement by the Employees’ State Insurance Corporation (ESIC) of its intention to reduce contribution rates for employees and employers.


NPS: The government-managed NPS defined contribution plan started in 2004 as compulsory for government employees and was opened up in 2009 to the entire population (including expatriate Indians abroad) with the goal of creating a retirement vehicle accessible to all. Employers can offer NPS participation as a tax-efficient and simple retirement savings option to their employees, and co-contribute to employees' accounts with contributions tax-deductible up to 10% of pay. Of companies surveyed by Willis Towers Watson in 2018, about 25% offer NPS participation, with another 20% considering doing so.

  • The government has announced that members can withdraw 60% of the NPS balance tax-free as a lump sum at retirement (currently 40% can be taken tax-free); enactment is expected in the summer, following the Indian general election.

EPS: The EPS is a defined benefit retirement program within the social security system, which was compulsory for employees covered under the Provident Fund Act. Initially, the employer’s 8.33% EPS contribution rate was based on monthly salary capped at the wage ceiling (INR 15,000 minus about USD 215; increased from INR 6,500 in 2014). A 1996 amendment allowed the option of employer EPS contributions on higher/uncapped pay, with employee/employer agreement. This “joint option” was rescinded, however, by a 2014 amendment, which also excluded employees earning over the wage ceiling from joining the EPS.

  • An October 2018 Kerala High Court ruling, affirmed by the Supreme Court in April 2019, reinstated the EPS joint option. In principle this allows employers to make EPS contributions based on employees’ higher/uncapped pay, and allows any past or present employee to elect to participate in the EPS retroactively, subject to transferring the necessary funds to EPS from their EPF account. No implementation guidance has been published yet, and it is possible that the Ministry of Labor might apply for a judicial review of the ruling.

EPF: The EPF is a defined contribution retirement program within social security (employers may opt out by establishing their own provident fund trust and guaranteeing the government-set interest rate paid to EPF accounts).

  • The Supreme Court recently ruled that statutory covered pay for the purpose of compulsory EPF employee and employer contributions should include allowances payable to all employees. Official guidance is pending to resolve the many questions raised about implementating the ruling. It is expected, though not certain, that the ruling will apply prospectively only, and that allowances need not be included for this purpose if an employee’s pay is above the monthly INR 15,000 ceiling or if the allowance is not universally and uniformly paid.

Employees’ State Insurance (ESI): ESI is a social security program providing short-term disability, medical care and parental leave benefits, covering employees earning under INR 21,000 per month.

  • Contributions are to be reduced from 1.75% to 1.00% of pay for employees, and from 4.75% to 4.00% of pay for employers; the effective date will be announced through a notification in the official Gazette. Effective March 1, 2019, the ESI funeral expense benefit limit increased to INR 15,000, from INR 10,000.


Multinational and large domestic employers in India typically offer supplemental retirement benefits, most commonly through EPF participation (with employer and employee each contributing 12% of uncapped basic pay). If it stands, reinstatement of the EPS joint option would permit a portion (8.33%) of the employer’s EPF contribution on higher/uncapped pay to be directed toward the EPS, enabling the employee to receive an enhanced defined benefit pension from the EPS. At the same time, an increasing number of employers in recent years have chosen to introduce the NPS as a retirement program for their employees, in part due to its clarity and tax efficiency, which would be enhanced by the announced additional tax break. Given the changing retirement landscape, employers should review how recent developments affect their retirement benefits and take the lead in helping their employees select the best-suited retirement arrangements.

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