Explainer: What Is PF And EPS, And How Your Retirement Pension Is Calculated?

For salaried employees, the biggest pillars of financial security are the Provident Fund (PF) and the Employees’ Pension Scheme (EPS). Every month, a portion of salary is set aside for the future, yet many employees remain unclear about where this money goes and how it benefits them after retirement.

Under the Employees’ Provident Fund Organisation (EPFO), EPF and EPS operate as two separate arrangements, each serving a distinct purpose.

EPF: Long-term Savings For Employees

EPF, or Employees’ Provident Fund, is essentially a long-term savings scheme. Both the employee and the employer contribute to it. The accumulated amount earns annual interest and can be withdrawn in full at the time of retirement or when an employee leaves the job.

This fund acts as a financial cushion, helping individuals meet large expenses or maintain stability after their working years.

EPS: Monthly Pension After Retirement

EPS, or the Employees’ Pension Scheme, is designed to provide a fixed monthly pension after retirement, ensuring a steady income in old age. An employee contributes 12 per cent of their basic salary and dearness allowance to EPF.

The employer also contributes 12 per cent, but this is divided: 8.33 per cent goes into the pension fund under EPS, while the remaining 3.67 per cent is added to the EPF account.

The government has capped the maximum salary for pension calculation at ₹15,000. Even if an employee earns more, pension calculations are based on this limit.

Importantly, a pension does not depend on the total amount accumulated in the EPS account. EPFO uses a fixed formula based on pensionable salary and pensionable service. The formula is: pensionable salary multiplied by pensionable service, divided by 70.

EPS also provides family pension benefits. If a member dies during service or after pension begins, the spouse receives 50 per cent of the pension for life. For example, if the pension was ₹7,500, the spouse gets ₹3,750 per month.

Two children are also eligible for 25 per cent each until the age of 25. In case of orphaned children, this can go up to 75 per cent. The minimum pension is ensured at ₹1,000.

Pension usually starts after 58 years of age. Early pension is allowed from 50 years with a 4 per cent annual reduction, while delaying pension beyond 58 years results in a 4 per cent increase for each additional year.

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