EPF vs EPS: What is the Difference?
To encourage savings habits, the Government of India has introduced various investment and savings schemes. The Employees’ Provident Fund( EPF) scheme and the Employees’ Pension Scheme (EPS) are two such schemes, particularly popular among salaried employees.
However, most people confuse the terms EPF and EPS. While both are savings schemes, they are different from one another. EPF offers you a lump sum retirement amount, whereas EPS is a pension scheme to help you earn regular income even after your retirement. Both schemes promote savings and aim to provide a larger financial cushion for employees after retirement.
Both schemes were introduced and are regulated by the Employees’ Provident Fund organization. EPFO is a statutory body under the Ministry of Labour and Employment of the Government of India. It administers social security schemes framed under the Employees’ Provident Funds and Miscellaneous Provisions Act, of 1952.
This article aims to clear the confusion between EPF and EPS and help you understand how you can benefit from these social security schemes.
What is EPF?
Employees’ Provident Fund is a retirement savings scheme maintained and offered by the Employees’ Provident Fund Organisation (EPFO). It covers employees working in an organization with an employee strength of more than 20.
You can invest in this scheme to build a corpus for your post-retirement years. You can also use EPF as an emergency fund.
Under rules set by the EPFO, the employer and the employee contribute 12% of the employee’s basic remuneration and Dearness Allowance(DA) towards this fund.
The employee’s entire contribution goes to the EPF. On the other hand, the employer’s contribution is divided into two parts:
- 3.67% goes toward the EPF.
- 8.33% is added to the Employee Pension Scheme (EPS).
There is one exception to this rule. If the employer’s EPS contribution exceeds ₹1249.50, then the excess amount goes to EPF.
The UAN or Universal Account Number is a distinguishing feature of EPF. The following points will help you understand UAN:
- UAN is a unique number allotted to each employee enrolled under this scheme.
- Your UAN will remain the same for your entire service tenure.
- You can access information related to your EPF using the UAN.
Benefits of EPF
- It helps you build a corpus for your golden years.
- You need not invest a lump sum in one go.
- Your employer contributes towards the fund. Hence, while the investment liability gets shared, you enjoy the final corpus entirely.
- You can partially withdraw EPF during emergencies.
- If your EPF contribution doesn’t exceed ₹2.5 lakh per year, the interest accrued is completely tax-free.
How to Calculate EPF?
To understand how EPF is calculated, here’s an example. Suppose the sum of your basic pay and dearness allowance is ₹27,000. In this case, 12% of ₹27,000 = ₹3240. Hence, you contribute ₹3240 monthly towards EPF.
As discussed, the employer’s share of 12% of basic salary + DA gets divided into two parts. In this case, 8.33% goes towards the EPS. The remaining 3.67% makes up the employer’s contribution towards EPF.
Employer’s contribution towards EPF: 3.67% of ₹27,000 = ₹990.90
Employer’s contribution towards EPS: 8.33% of ₹27,000 = ₹2249.10
However, in this example, your employer is contributing nearly ₹1000 over and above the EPS threshold of ₹1249.50. Thus, the excess contribution of ₹999.60 (₹2249.10 – ₹1249.50) is added to your EPF.
Hence, your EPF accumulates ₹1,990.5 (₹990.90 + ₹999.60) monthly.
Therefore, the total contribution by the employer and the employee per month is ₹5230.50.
What is EPS?
Employee Pension Scheme, commonly known as EPS, is a pension scheme backed by the Government of India.
Like EPF, the UAN is crucial for EPS too. Among other things, you can check your latest EPS balance on the EPFO portal using UAN.
The pension fund is released when the employee turns 58, provided they have completed at least ten years of service.
Benefits of EPS
- EPS is a continuous and steady source of income after retirement.
- Posthumously, the nominee will receive a pension.
- The EPS amount can also be withdrawn if the employee is continuously unemployed for over two months.
How to Calculate EPS?
EPS calculation involves the following two parameters:
- pensionable service
- pensionable salary
This formula can be used to calculate the pension amount:
Pensionable Service × Pensionable Salary / 70
The terms pensionable service and pensionable salary are decoded below:
- ‘Pensionable service’ means the total number of years for which contributions were made towards the EPS account.
- ‘Pensionable salary’ means the average of the last drawn salary.
Now, let’s consider that your pensionable salary is ₹14,000 and your pensionable service is 35 years. So, after applying the above formula, your monthly pension stands at ₹7,000.
EPF vs EPS
This table demonstrates the fundamentals of EPF and EPS.
|Contribution to the scheme
|The employee contributes 12% of their basic salary and DA.
The employer contributes 3.67% of the employee’s basic salary and DA.
|The employee need not contribute.
The employer contributes 8.33% of the employee’s basic salary and DA.
|There is no absolute limit.
|The maximum contribution limit is set at ₹1250.
|All employees can subscribe to EPF.
|The upper limit on salary for calculation of EPS contribution is Rs. 15,000.
|The full amount and interest are payable:When an employee turns 58, andIf an employee is unemployed for a continuous period of 60 days.
|An employee who has attained 58 years of age is paid a regular pension. Upon the employee’s death, the pension is paid to the nominee.
|If withdrawn before 5 years of service, the amount withdrawn is taxable.
However, the employee can withdraw the entire amount if unemployed for 60 days at a stretch.
|The employee can prematurely withdraw a lump sum, before the completion of 10 years of service or if the employee has attained 58 years of age, whichever is earlier.
Employees can receive an early pension as soon as they turn 50, provided they have completed 10 years of service.
|Every quarter, the Government of India reviews and fixes the interest rate. The current interest rate is 8.10% p.a.
|No interest accumulates in this case.
|Interest earned on contributions up to Rs. 2.5 lakhs annually is tax-free.
|Since employees do not contribute to EPS, no tax benefits are available. Lump-sum withdrawals and payable pensions both attract taxes.
In this article, we have tried to decode the differences between EPF and EPS. Although both are employee welfare schemes, they differ from each other significantly. Both EPS and EPF serve different and essential purposes. If you are employed with an organisation with 20 or more employees, EPF and EPS will help you in your retirement planning.
Can I withdraw a lump sum from EPS?
Yes, you can withdraw a lump sum from your EPS account, provided you have not completed ten years of service. In case the employee has completed 10 years of service, a pension certificate is issued.
Is it possible to withdraw EPF before maturity?
Yes, you can withdraw the EPF amount prematurely under certain circumstances. These include:
Constructing or purchasing a plot/house
Repairing existing house
Medical treatment for severe illness
Marriage or education
Is contribution to the Employees’ Provident Fund (EPF) mandatory?
Contribution to the Employees’ Provident Fund is mandatory for employees with salary (basic + DA) less than or equal to Rs. 15,000.
Is an EPF or EPS account transferable?
Yes, an EPF or EPS account is transferable. Every contributing member is given a Universal Account Number (UAN) by the Employees Provident Fund Organisation (EPFO). This number remains the same throughout the employee’s service life, irrespective of the number of jobs they change.
What happens to the EPS pension after death?
On the employee’s demise, the EPS pension is paid to the:
– and two children under 25 years of age.
-If one child turns 25, the second child who is less than 25 years will receive the pension.
-If the deceased employee has a disabled child, they will receive a lifelong pension.
-Only two children are entitled to the retirement pension at a time.
-If the deceased employee did not have a family, then the nominee will receive the pension amount.
-If the deceased employee did not nominate anyone but has dependent parents, then the father will receive the pension, and upon his demise, the mother will receive it.