When planning for retirement in India, two important schemes come into play: the Employees’ Provident Fund (EPF) and the Employees’ Pension Scheme (EPS). While both aim to provide financial security post-retirement, they function differently. Let’s break down their differences in simple terms.
What is EPF?
The Employees’ Provident Fund (EPF) is a savings scheme where both the employee and employer contribute a portion of the employee’s salary every month. This accumulated amount, along with interest, is available as a lump sum upon retirement or under certain conditions like unemployment.
Key Features:
- Contributions: Both employee and employer contribute 12% of the employee’s basic salary and dearness allowance.
- Interest: The EPF account earns interest annually, determined by the government.
- Withdrawal: Full withdrawal is allowed upon retirement or after two months of unemployment. Partial withdrawals are permitted for specific needs like medical emergencies or home purchases.
- Tax Benefits: Contributions qualify for tax deductions under Section 80C of the Income Tax Act.
What is EPS?
The Employees’ Pension Scheme (EPS) is designed to provide a monthly pension to employees after retirement. Unlike EPF, only the employer contributes to EPS.
Key Features:
- Contributions: The employer contributes 8.33% of the employee’s salary (up to ₹15,000) towards EPS.
- Pension Eligibility: Employees become eligible for a pension after completing 10 years of service and reaching 58 years of age. Early pension can be availed from age 50 with reduced benefits.
- No Interest: EPS does not earn interest like EPF.
- Taxation: Pension received from EPS is taxable as per the individual’s income tax slab.
EPF vs EPS: A Comparative Table
| Feature | EPF | EPS |
|---|---|---|
| Purpose | Retirement savings (lump sum) | Monthly pension post-retirement |
| Employee Contribution | 12% of basic salary + dearness allowance | None |
| Employer Contribution | 3.67% to EPF | 8.33% to EPS (up to ₹1,250 per month) |
| Interest | Earns annual interest | No interest |
| Withdrawal | Full amount after retirement or unemployment | Monthly pension after 10 years of service and age 58 |
| Tax Benefits | Contributions deductible under Section 80C | Pension is taxable |
| Minimum Service Requirement | No minimum for EPF withdrawal | 10 years for pension eligibility |
Real-Life Example
Scenario: An employee earns a basic salary of ₹15,000 per month.
- EPF Contributions:
- Employee: 12% of ₹15,000 = ₹1,800
- Employer: 12% of ₹15,000 = ₹1,800
- Out of this, 3.67% (₹550.50) goes to EPF, and 8.33% (₹1,249.50) goes to EPS.
Over time, the EPF account accumulates with interest, providing a substantial lump sum at retirement. Simultaneously, the EPS ensures a steady monthly pension post-retirement.
Conclusion
Both EPF and EPS are integral components of retirement planning for salaried employees in India. While EPF focuses on building a retirement corpus through regular savings and interest, EPS ensures a continuous income stream after retirement. Understanding the distinctions between the two helps in making informed financial decisions for a secure future.
Note: For detailed information and personalized advice, consider consulting financial experts or visiting official resources like the Employees’ Provident Fund Organisation (EPFO).
