EPF and EPS - What’s the Difference?

EPF and EPS - What’s the Difference?

Employee Provident Fund (EPF) and Employee Pension Scheme (EPS) are two pillars of social security in India, offering financial security after retirement. Both schemes are mandated by the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, but cater to different aspects of retirement planning.

Their Contributions

• EPF: This scheme fosters a culture of shared savings. Both employers and employees contribute 12% of the employee's basic salary and dearness allowance towards the EPF account. There's no upper limit on contributions.
• EPS: Here, the responsibility falls solely on the employer. They contribute 8.33% of the employee's basic salary (capped at Rs. 1,250 per month) towards the EPS account. Employees do not contribute to EPS.

Eligibility

• EPF: This scheme is universally applicable to all salaried individuals working in organizations with at least 20 employees.
• EPS: Eligibility for EPS is restricted to employees earning a basic salary plus dearness allowance up to Rs. 15,000 per month.

Benefits

• EPF: The EPF scheme provides a lump sum amount upon retirement, typically at the age of 58. Early withdrawal is also permitted under specific circumstances, such as unemployment exceeding 60 days or specific financial needs. However, early withdrawals before five years of service may incur taxes. The EPF account earns interest at a fixed rate declared by the government periodically. Currently, the interest rate stands at 8.15% per annum. Importantly, contributions, interest earned, and the final payout from the EPF account are all exempt from taxes, making it a tax-efficient savings option.
• EPS: This scheme focuses on providing a regular pension after retirement. The pension amount is calculated based on a formula that considers the employee's average salary during the last year of service and the total number of years worked (pensionable service), divided by 70. Unlike EPF, EPS does not accrue any interest on the contributions. The minimum age for availing a regular pension is 58 years. However, early pensions can be drawn at 50 years of age under certain conditions. In the unfortunate event of an employee's death, the spouse or nominee continues to receive the pension. While there's no tax benefit on contributions to EPS, a portion of the pension amount may be taxable depending on the total income of the retiree.

Additional Considerations

• Transferability: A significant advantage of EPF is its portability. When an employee changes jobs, their EPF account can be easily transferred to the new employer, ensuring a seamless continuation of contributions and benefits.
• Tax Implications: As mentioned earlier, EPF offers significant tax benefits. Contributions made towards EPF by both the employer and employee are tax-deductible up to a certain limit under Section 80C of the Income Tax Act. Additionally, the interest earned on the EPF balance and the final withdrawal amount are also tax-exempt. In contrast, EPS contributions do not offer any tax benefits to the employee, and a portion of the pension received might be taxable depending on the tax bracket of the retiree.

Strategic Planning

Understanding the nuances of EPF and EPS empowers employees to make informed decisions regarding their retirement savings.  For individuals seeking a larger lump sum corpus at retirement, maximizing contributions towards EPF might be a good strategy.  On the other hand, those prioritizing a steady stream of income post-retirement may benefit from exploring options to increase their EPS eligibility (if their salary falls below the Rs. 15,000 threshold).

Conclusion

EPF and EPS work in tandem to provide a comprehensive social security framework for Indian employees. EPF accumulates a lump sum corpus for a financially secure retirement, while EPS offers a steady stream of income as a pension.