Employee Pension Scheme: Overview, Benefits And More

Mutual funds

The Employees’ Provident Fund Organisation (EPFO) introduced the Employee Pension Scheme, or EPS, in 1995. It is a social security scheme that aims to help employees enjoy a secure retirement. 

However, before you and your employer enroll in this scheme, it is crucial to know how EPS calculation works and its features. So, keep reading to gather an overview of the Employee Pension Scheme.

What is the Employee Pension Scheme (EPS)?

EPS makes provisions for those employees who have provided 10 years of service to receive a pension after the age of 58. Existing members of the Employees’ Provident Fund (EPF) and new members are welcome to join this scheme. 

In September 2014, the Employees’ Provident Fund Organisation made changes to the existing Employee Pension Scheme. Under EPS, the employer and employee contribute 12% of the employee’s basic salary as well as the Dearness Allowance (DA) towards EPF. 

However, while an employee’s entire share goes towards EPF, 8.33% of an employer’s share contributes towards EPS. The remaining 3.67% goes to EPF. Thus, the total contribution is 8.33% for EPS and 15.67% for EPF. 

This scheme is backed by the Government of India and thus, guarantees a pension amount after a beneficiary reaches the age of 58. 

Eligibility Criteria for EPS 

If you want to enjoy the benefits under Employee Pension Scheme, you’ll have to meet the following eligibility requirements:

• It is mandatory for an individual to be a member of the Employees’ Provident Fund Organisation. 
• Individuals should be in service for 10 years. These 10 years don’t need to be continuous. 
• To receive a regular pension, a beneficiary needs to be 58 years old. However, an early pension is available once they reach 50. 
• Upon the death of a pensioner, a family member is eligible to get the pension amount. 

Features of EPS

To understand how EPS works and what it offers, take a look at its following features:

• It is mandatory for every employee with a basic salary + DA of less than or equal to Rs. 15,000 to enrol in EPS. 
• The minimum monthly pension amount is Rs. 1,000 for member/widow/widower/disabled/nominee, Rs. 250 for child pensioners and Rs. 750 for orphan pensioners. 
• One can withdraw the EPS pension amount after attaining the age of 50. However, this amount will be available at a reduced interest rate. 
• If widows or widowers are receiving the EPS amount, they will continue to do so till their death. After their demise, their children can receive the pension amount till the age of 25. 
• If widows or widowers get remarried, their children receive the pension amount under the category of “Orphans”.

Benefits of Enrolling in Employee Pension Scheme

Before enrolling in any scheme, it is rational to think about the benefits that it has to offer. So, here is a list of some salient advantages that you will be able to enjoy with EPS:

•  Financial assistance 

Primarily, this scheme is designed to provide a regular source of income to employees after their retirement. If you meet the eligibility criteria, then after the age of 58, you can withdraw your monthly pension by filling out Form 10D. 

Furthermore, as the Government of India supports this scheme, you will receive guaranteed returns and pension. 

• Pension for the disabled 

In case an employee becomes totally or permanently disabled, he/she is entitled to receive a monthly pension. This benefit is available for employees even if they do not meet the service period requirement. The monthly pension becomes available from the date of disablement and continues for a lifetime.

• Pension benefit for those Incapable of meeting service period criterion

If an individual is unable to complete 10 years of service before turning 58 years old, they can receive a lump sum pension amount. For this, they have to fill out form 10C. However, they will not be eligible to receive EPS amount monthly. 

Types of Pension under EPS

Under the Employee Pension Scheme, there are four types of pensions. Let’s check them out. 

Widow pension

The widow or widower of a person who is eligible for EPS receives the pension amount till their death or remarriage. In the case of more than one widow, the eldest becomes the beneficiary. The minimum amount is Rs. 1,000 but can be more depending on the member’s pension. 

Child pension

In addition to the widow’s pension, the children of a deceased member also become beneficiaries of the EPS amount. However, this benefit is only available till 25 years of age, and the maximum pension amount can be 25% of the widow’s pension. 

Orphan pension

If the deceased member has no surviving widows, then the children can get up to 75% of the widow’s monthly pension. However, only two children can benefit from this provision and priority is given to the oldest. 

Reduced pension

If a member completes 10 years of service before attaining the age of 58 but after 50, he/she will get a reduced pension. The reduced rate is 4% for each year till the person reaches 58 years of age.

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How Does Monthly Pension Calculation Work?

The calculation of monthly pension can be done under two categories:

• For individuals who joined EPFO before November 16 1995

The amount of pension these individuals will receive depends on their salary bracket. Here is a table to show the breakdown of their pension amount:

• For individuals who joined after November 16 1995

The pension amount of these individuals depend on their pensionable salary and pensionable service. You can use a simple formula to calculate your monthly pension amount. 

Monthly pension amount = (Pensionable salary x pensionable service) / 70

1. Pensionable salary

It refers to the member’s average monthly salary in the last 60 months before exiting the scheme. As of September 2014, there is a Rs. 15,000 limit on monthly pensionable salary. However, during this calculation, we do not take into account the non-contributory days of the month. The employee receives the benefit of these non-contributory days. 

For example, let’s say an employee has a monthly salary of Rs. 15,000. He/she works for 25 days in a month (instead of 30) and earns Rs. 12,500. The pensionable income will be Rs. 15,000. 

Given an employer’s contribution of 8.33% of an employee’s salary to EPS, the monthly pension deposit is —

Rs. 15,000 x 8.33/100 = Rs. 1250

2. Pensionable service

It refers to the number of years for which a member serves. While calculating the total pensionable service, we evaluate all the years a member works under different or same employers. Thus, before switching jobs, it is necessary to have an EPS certificate. 

As per law, one needs to round off the pensionable service to the nearest year for calculation. Thus, if you serve for five years and four months, your pensionable service is five years. Note that those with 20 years of service get a bonus of two years.

So, if an individual has 15 years of service and a pensionable salary of Rs. 15,000, his/her monthly pension amount is —

(15,000 x 15) / 70 = Rs. 3,214.28 (approx.)  

Various Types of Pension Forms

To avail of benefits of the Employee Pension Scheme, a member needs to fill out the following forms, if applicable to them:

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Final Word

After working rigorously for years, every employee deserves to enjoy a secure and happy retirement. With multiple schemes, plans and initiatives, the Government of India does its best to ensure that citizens meet this goal. 

The Employee Pension Scheme is one such initiative. However, before you enrol in this scheme, you should learn about how EPS calculation works and its eligibility. 

Frequently Asked Questions on EPF

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.