Every month, a portion of a salaried employee’s income is set aside as Provident Fund (PF), but many are unaware that this deduction is divided into two separate components, one meant for a retirement
lump sum and the other for a lifelong monthly pension. Both fall under the Employees’ Provident Fund Organisation (EPFO) and together form the backbone of social security for organised sector employees.
Under the EPFO framework, two schemes operate simultaneously, the Employees’ Provident Fund (EPF) and the Employees’ Pension Scheme (EPS). While EPF helps build a sizeable corpus that can be withdrawn at retirement, EPS ensures a fixed monthly pension after the age of 58.
Confusion often arises among employees about how pension is calculated, but experts point out that the pension amount does not depend on the total balance in the PF account. Instead, it is determined by the number of years an employee has worked and a fixed salary ceiling.
When 12% of an employee’s basic salary and dearness allowance is deducted as PF, the employer contributes an equal amount. However, the employer’s contribution is split. Of this, 8.33% is diverted to the EPS, calculated on a maximum salary cap of Rs 15,000, while the remaining 3.67% goes into the EPF account, which earns annual interest.
The pension under EPS is calculated using a standard formula based on ‘pensionable service’, which is the total number of years worked, and ‘pensionable salary’. For instance, an employee with a pensionable salary of Rs 15,000 and 35 years of service would receive a pension calculated as per this formula. To safeguard retirees, the government has fixed the minimum monthly pension at Rs 1,000.
One of the key strengths of the EPS lies in the family security it offers. In the event of an employee’s death, the spouse is entitled to 50% of the member’s pension for life. Two children receive 25% each until the age of 25, and in the case of orphaned children, the benefit rises to 75%.
While the normal pension age is 58, employees have flexibility. Pension can be availed after the age of 50, though it is reduced by 4% for every year of early withdrawal. Conversely, those who delay taking pension beyond 58 and continue working are rewarded with a 4% increase in pension for each additional year.
Together, the EPF and EPS schemes aim to provide both a substantial retirement corpus and a steady post-retirement income, helping employees maintain financial stability and dignity in old age.
