New Delhi: For salaried employees, the most important financial security comes from their Provident Fund (PF) and the Employees’ Pension Scheme (EPS). Every month, a portion of their salary is deducted and saved for the future. However, many employees are unaware of how this money is divided and what benefits they receive after retirement. Under the Employees’ Provident Fund Organisation (EPFO), PF and EPS are two separate schemes with different objectives and advantages.
What is PF and How Does It Work?
The Employees’ Provident Fund (EPF) is a long-term savings scheme where both the employee and employer contribute. The amount saved earns interest annually and can be withdrawn in full upon retirement or when leaving the job. Typically, 12% of the employee’s basic salary plus dearness allowance (DA) is deposited into their EPF account every month.
Understanding EPS and Pension Calculation
The Employees’ Pension Scheme (EPS) aims to provide a fixed monthly pension to the employee after retirement, ensuring a steady income in old age. Out of the employer’s 12% contribution, 8.33% goes directly into the EPS (pension fund), while the remaining 3.67% is added to the EPF account.
The government has set a maximum salary limit of ₹15,000 for pension calculation. This means even if the actual salary exceeds this amount, the pension will be calculated based on ₹15,000.
It is important to note that the pension amount is not based on the total amount accumulated in the EPS account. Instead, EPFO uses a specific formula:
Pension = Pensionable Salary × Pensionable Service ÷ 70. This determines the monthly pension amount after retirement.
Family Benefits and Pension Options
One key benefit of EPS is the family pension. In case the employee passes away during service or after starting to receive pension, the spouse receives 50% of the employee’s pension for life. For instance, if the pension was ₹7,500 per month, the spouse would get ₹3,750 monthly.
Additionally, two children of the member are eligible for child pension, receiving 25% each of the original pension amount until they turn 25 years old. If the children become orphans, the pension amount increases to 75%. The government has also ensured the minimum pension amount does not go below ₹1,000.
Usually, pension is available after the age of 58, but there is an option for early pension from 50 years of age. However, early pension comes with a 4% reduction in pension amount every year before 58. Conversely, if an employee chooses to continue working beyond 58 and delays pension withdrawal, their pension increases by 4% annually.
Understanding these details can help employees better plan their retirement and financial security through PF and EPS.
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