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India: Proposal for a new retirement plan option under the Employees’ Provident Funds Act

Retirement|Total Rewards

By Jehangir Damkevala and Ritobrata Sarkar | November 28, 2019

The proposal gives workers the option to participate in the National Pension System (NPS), a potentially appealing choice due to NPS tax treatment and payment options.

Employer action code: Monitor

The social security system is based on mandatory participation in the Employees’ Provident Fund (EPF) and its companion program, the Employees’ Pension Scheme (EPS), for workers with monthly earnings up to INR 15,000. Higher-earning employees can participate on a voluntary basis in the EPF, and in the EPS as well according to an October 2018 Kerala High Court ruling upheld by the Supreme Court in April 2019. Participation of higher earners in the EPS has long been problematic. The EPF Act was amended in 1996 to allow for employer EPS contributions on pay in excess of the EPF ceiling, but that option was rescinded by a 2014 amendment, which also excluded employees with pay above the wage ceiling from joining the EPS.

The government has put forth draft legislation — The Employees' Provident Funds and Miscellaneous Provisions (Amendment) Bill, 2019 — that would, among other things, allow for the transfer of a member’s equitable interest from the EPS to the National Pension System (NPS). The NPS is a defined contribution (DC) program established by the central government in 2004 for new government employees. In 2009, participation in the NPS was opened to the entire working population (ages 18 to 60), providing a new option for supplemental retirement benefits for employees covered by the EPF system. For employees of small firms not covered by the EPF (those with fewer than 20 workers), the self-employed and workers in the informal sector, the NPS is their main available retirement benefit.

Key details

  • Giving employees the option to transfer their equitable interest from EPS to NPS: For an employee selecting this option, future employer contributions (8.33% of pay up to INR 15,000 per month) would be directed to the employee’s NPS account rather than to the EPS, and the value of the employee’s EPS entitlement based on past service (calculation methodology to be determined) would be transferred to his or her NPS account. A potential benefit for employees would be that up to 60% of the NPS balance is available as a tax-free lump sum at retirement; the remaining 40% must be converted to a taxable annuity. In contrast, EPS benefits are payable as a taxable lifetime annuity with no lump sum payment option; however, the EPS provides a defined benefit, while there are no benefit or interest rate guarantees in the NPS. Employees would also be able to opt to transfer back to the EPS from the NPS at a later date.
  • Redefining “wages” under the EPF Act so that allowances comprising more than 50% of monthly wages would be included in covered pay for EPF/EPS purposes: This draft legislation is consistent with, and provides details for, a related February 2019 Supreme Court ruling (see Global News Brief, April 2019).
  • Enabling the government to change employee EPF contribution rates (no change to employer contributions) based on factors such as age, income and gender: This provision stems from a previous budget announcement calling for employee EPF contributions to be made optional for those earning below a certain threshold.

Employer implications

The proposed changes to the definition of EPF wages and employee contribution rate setting are primarily a concern only for lower-paid employees, but the option to participate in the NPS in place of the EPS may potentially be of interest to a wider range of employees for reasons of the NPS tax treatment and payment options. An increasing number of employers (28% of companies surveyed) offer the NPS as a supplemental retirement plan for their employees for those same reasons. If approved, we would expect that trend to accelerate. The prospects for passage of the draft measures are unclear, as at least one significant labor union has voiced resistance to the EPS/NPS option and the government has indicated that it is reconsidering it.


Jehangir Damkevala
Retirement Trust Consulting Leader - India

Ritobrata Sarkar
Head of Retirement - India
Willis Towers Watson

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