Employee Pension Scheme: Eligibility, Benefits & Contributions
Looking ahead to your golden years? In India, the Employee Pension Scheme might be your financial backbone after retirement. The program ensures steady income when you retire, with employers setting aside money while you work. Most salaried workers in India qualify automatically when they join a company.
What Is the Employee Pension Scheme (EPS)?
Started in ’95 under India’s labor laws, EPS provides pension based on how long you worked and what you earned. Payments typically begin at age 58, and if you pass away, your family may get support. The EPFO manages it, mainly through employer money.
Who Is Eligible for EPS?
Not everyone with EPF gets pension benefits. Several factors like salary, date of joining, and past membership status decide your eligibility.
- Employees Joining After September 1, 2014, with Salary ≤ ₹15,000
The pension door opens automatically for all who joined a company that’s registered with EPF after September 2014 if the monthly earnings (basic salary plus living allowance) were ₹15,000 or below.
- Employees with Salary Above ₹15,000 Are Excluded
The employer’s full 12% contribution lands directly in the provident fund account, with nothing set aside for future pension payments. If you start at ₹20,000, you stay excluded even if pay drops later. The status gets locked in on day one – no second chances or later adjustments. The higher earners have to rely on EPF savings or private retirement plans.
- Pre-2014 Members Retain EPS Membership Regardless of Salary
Workers who joined the pension plan before September 2014 don’t lose their membership, even when their paychecks grow beyond the ₹15,000 boundary, honouring commitments made under the old rules. For these veterans, the system continues to set aside 8.33% of their salary (though calculated only up to ₹15,000) toward their future pension, creating a fair bridge between the old system and the new.
- No Rejoining EPS After Full Withdrawal If Salary > ₹15,000
Here’s a critical caveat: When switching jobs, if you cash out completely from the pension program and later find work at another participating company, your salary at that new job determines whether you can rejoin. The new paycheck should stay at or below the ₹15,000 mark to squeeze back in only if you haven’t already clocked ten years of service.
Breakup of Contributions: How EPS Is Funded
The pension plan gets its funding through a clever division of workplace contributions. Both you and your boss chip in 12% of your basic salary (plus a cost-of-living adjustment) to the larger provident fund system. Let us see how the contributions get sliced and routed:
- Total Contribution: Employers contribute 12% of the employee’s salary to the EPF system.
- EPS Allocation: Out of this 12%, 8.33% is diverted to the EPS, but only up to a wage ceiling of ₹15,000 per month.
- Maximum EPS Contribution: This caps the monthly EPS contribution at ₹1,250 (8.33% of ₹15,000). Even if your salary is higher, the EPS contribution doesn’t exceed this amount.
- Remaining Share: The rest of the employer’s contribution (3.67% if salary ≤ ₹15,000, or the full 12% if salary > ₹15,000 and no EPS applies) goes to the employee’s EPF account.
Employee’s Contribution
- Total Contribution: Employees also contribute 12% of their salary, but this entire amount goes to their EPF account.
- No Direct EPS Contribution: Unlike the employer’s share, employees don’t directly fund EPS. Their contribution builds their retirement savings in the EPF, while the employer’s EPS allocation secures their pension.
Whether you earn exactly ₹15,000 or triple that amount, your employer puts the same maximum amount into your pension, which has sparked criticism.
Why Does EPS Matter?
After completing 10 years of contributory service, members qualify for a monthly pension starting at age 58 (or earlier at 50 with a reduced amount). The pension amount is calculated using the formula:
Pension = (Pensionable Salary × Service Years) ÷ 70
Where Pensionable Salary is the average salary of the last 60 months (capped at ₹15,000 for contributions post-2014), and Service Years is the total contributory period. For example, with 20 years of service and a pensionable salary of ₹15,000, the pension would be ₹4,285 per month—a modest but steady income.
EPS offers survivor benefits: The spouse receives a widow/widower pension, and children may get additional support until age 25.
Challenges and Considerations
The ₹15,000 pay cap hasn’t changed since 2014 despite rising costs, and the ₹1,250 monthly payment limit means too-small pensions. The strict rules hurt workers who take career breaks.
A strong understanding of financial frameworks like EPS is invaluable for those pursuing careers in finance, accounting, and investment planning. At Finspire Academy in Chennai, students gain expertise through programs like FINSURE, US CPA, US CMA, and B. Com, preparing them for success in the financial sector.
Whether you aspire to be a financial consultant, auditor, or investment planner, mastering pension structures and financial planning will give you a competitive edge. Learn more about Finspire Academy’s programs today: https://finspireacademy.com.
