Many salaried employees in India contribute to retirement schemes without fully understanding how they work. A common source of confusion is the difference between the Employees' Provident Fund (EPF) and the Employees' Pension Scheme (EPS).
While both are governed by the Employees' Provident Funds Act, 1952, their purpose, structure and benefits are distinct.
Here's a simple explainer on how EPF and EPS differ, how contributions are calculated and what benefits employees can expect.
Three social security schemes under EPF Act
The Employees' Provident Funds Act regulates three major social security schemes for organised sector employees:
- Employees' Provident Fund (EPF) Scheme, 1952
- Employees' Deposit Linked Insurance (EDLI) Scheme, 1976
- Employees' Pension Scheme (EPS), 1995
Among these, EPF and EPS are most relevant for retirement planning and are often mistaken for one another.
What is the Employees' Provident Fund (EPF)?
EPF is a government-backed retirement savings scheme managed by the Employees' Provident Fund Organisation (EPFO). It is designed to help employees build a retirement corpus through regular monthly contributions made by both the employee and the employer.
The accumulated amount earns interest and can be withdrawn at retirement, resignation, or under specific conditions such as medical emergencies, housing needs or higher education.
What are key benefits of EPF
Here is a summary of the benefits of the EPF scheme:
- Retirement Corpus: Regular contributions help build a sizable lump sum that can be used post-retirement.
- Guaranteed Returns: EPF offers fixed returns and is backed by the government, ensuring safety of funds.
- Tax Benefits: Employee contributions qualify for deduction under Section 80C, up to Rs 1.5 lakh per financial year.
- Partial Withdrawals: Subscribers can withdraw part of the corpus for housing, education or medical needs after completing seven years of service.
What is Employees' Pension Scheme (EPS)?
EPS is a pension scheme that operates alongside EPF. Unlike EPF, employees do not directly contribute to EPS. Instead, a portion of the employer's EPF contribution is diverted to the pension fund.
EPS provides a monthly pension to employees after retirement, calculated on the basis of years of service and average salary during the final years of employment. The scheme is also administered by EPFO.
How EPF contributions calculated
For contribution purposes, 'salary' refers to basic pay plus dearness allowance (DA).
Contribution Rate
- Employee contribution to EPF 12 per cent of salary
- Employer contribution to EPF 3.67 per cent of salary
- Employer contribution to EPS 8.33 per cent of salary
Understand with example
For instance, if the monthly salary is Rs 30,000:
- Employee contribution to EPF: 12 per cent of Rs 30,000 = Rs 3,600
- Employer contribution to EPF: 3.67 per cent of Rs 30,000 = Rs 1,101
- Employer contribution to EPS: 8.33 per cent of Rs 15,000 (salary ceiling) = Rs 1,250
Even though the employee earns Rs 30,000, the employer's EPS contribution is capped at 8.33 per cent of Rs 15,000, which comes to Rs 1,250. Any remaining employer contribution goes into EPF.
How EPS Pension is calculated
Employees do not contribute directly to EPS. The employer contributes 8.33 per cent of salary, subject to a salary ceiling.
The monthly pension is calculated using the formula:
- Monthly Pension = (Pensionable Service × Pensionable Salary) ÷ 70
- Pensionable service refers to total years of contribution
- Pensionable salary is the average basic salary drawn during the last five years before retirement
Key benefits of EPS
Here is the list of key benefits of the EPS:
- Monthly Pension: EPS provides a stable monthly income after retirement
- Family Pension: In case of the subscriber's death, the spouse is entitled to a family pension
- Disability Pension: Employees who suffer permanent disability can receive lifelong pension benefits
- Portability: EPS accounts can be transferred when an employee changes jobs, ensuring continuity
EPF vs EPS: What sets them apart?
| Aspect | EPF | EPS |
|---|---|---|
| Nature | Retirement savings scheme | Pension scheme |
| Purpose | Lump sum payout | Monthly pension |
| Employee contribution | 12 per cent | Nil |
| Employer contribution | 3.67 per cent | 8.33 per cent |
| Eligibility | All EPFO-covered employees | Salary + DA up to Rs 15,000 |
| Maximum contribution | No upper limit | Capped at Rs 1,250 |
| Interest | Earns interest | No interest |
| Withdrawals | Allowed | Not applicable |
| Tax treatment | Eligible under Section 80C | Pension taxable as per slab |
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
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