If you are a salaried employee in India, a portion of your salary is compulsorily set aside every month towards two retirement-linked instruments — Employees’ Provident Fund (EPF) and Employees’ Pension
Scheme (EPS). While most employees see these deductions in their payslips, far fewer understand how the two differ, what they actually build over time, and what they will eventually receive after retirement.
According to reports, the government is considering raising the minimum pension amount under EPS-95 to Rs 3,000, compared with Rs 1,000 currently. The Employees’ Pension Scheme, 1995, is also known as EPS-95.
Difference Between EPF and EPS
Both EPF and EPS are administered by the Employees’ Provident Fund Organisation under the EPF & Miscellaneous Provisions Act, 1952. However, their design and purpose are fundamentally different.
EPF functions as a long-term savings instrument for employees. Contributions made by both the employee and employer accumulate over time and earn a fixed annual interest (currently 8.25%). At retirement or exit, the accumulated corpus is paid out as a lump sum.
EPS, in contrast, is not a savings pool. It is a defined benefit pension scheme. It neither generates a corpus in your name nor does it earn interest. Instead, it ensures a fixed monthly pension for you after superannuation (58 years of age), based on a formula linked to your salary and years of service.
For this, members must contribute to the EPS for a minimum of 10 years. Members may start receiving a reduced pension from the age of 50 or a full monthly pension from the age of 58.
In simple terms, EPF builds wealth, while EPS provides income.
PF Contribution: Where Your Money Actually Goes
Every month, 12% of your basic salary is contributed by you, and an equal 12% is contributed by your employer. However, the employer’s share is split.
- Your entire 12% contribution goes into EPF.
- From the employer’s 12% contribution:
- 8.33% is diverted to EPS (subject to a salary cap of Rs 15,000 and a maximum of Rs 1,250 per month)
- The remaining 3.67% goes into your EPF account
EPF provides a lump sum at retirement, with returns compounded over decades. EPS provides a fixed monthly pension, with no compounding and no inflation adjustment.
EPF allows partial withdrawals under specified conditions and full withdrawal at exit. EPS allows pension only after 58 years (or early pension with reductions from age 50), and requires a minimum of 10 years of service.
Most importantly, EPF outcomes scale with salary growth and tenure. EPS outcomes are capped due to the pensionable salary limit of Rs 15,000.
EPF Accumulation: The Real Retirement Engine
The strength of EPF lies in compounding. A salaried individual starting early, staying invested for 30-35 years, and allowing contributions to grow with salary increments can accumulate a substantial corpus. In many realistic scenarios, this can range between Rs 2 crore to Rs 3.5 crore over a full career, assuming consistent contributions and no withdrawals.
Importantly, frequent withdrawals during job switches significantly erode long-term compounding.
EPS-95 Pension
EPS pension is calculated using a fixed formula:
Monthly Pension = (Pensionable Salary × Pensionable Service) ÷ 70
Pensionable salary is capped at Rs 15,000, regardless of actual earnings (unless higher pension options are exercised separately under specific provisions). Pensionable service includes total years worked, along with a maximum bonus of up to 4 years.
Even in a full-career scenario (35-40 years of service), the pension typically maxes out at Rs 8,571 per month under standard EPS rules. This ceiling is the single biggest limitation of the scheme.
For those eligible, the minimum pension is Rs 1,000. According to reports, the government might increase this to Rs 3,000, as the proposal is under consideration.
Eligibility and Conditions
To qualify for a regular EPS pension, an employee must complete at least 10 years of contributory service and attain 58 years of age.
Early pension is allowed from age 50, but with a reduction of 4% for every year short of 58.
If an employee exits before completing 10 years, they are not eligible for a pension. Instead, they may withdraw a limited amount or opt for a scheme certificate to carry forward service.
EPS also has a social security dimension. In the event of the member’s death, a portion of the pension is extended to the spouse and children, making it a family protection mechanism rather than just an individual retirement tool.
No Inflation Protection
The EPS pension is fixed. It does not adjust for inflation. This means that while Rs 8,571 per month may appear modest today, its real value declines sharply over time. Over a 15-20 year retirement horizon, the purchasing power of this pension can reduce significantly.
However, the government keeps increasing it periodically. The previous revision took place in 2014, when the ‘basic pay’ amount under the formula was increased from Rs 6,500 to Rs 15,000, thus increasing the pension.
However, the EPS-95 is a basic social security layer, not a complete retirement solution.
The second layer of retirement planning can be the National Pension System (NPS), which offers an additional pension stream along with tax efficiency under Section 80CCD(1B). The third layer involves personal investments, including mutual fund SIPs, PPF, and adequate health insurance.
(Disclaimer: This article is for informational purposes only and does not constitute financial or legal advice.)
