India's Employees' Provident Fund (EPF) and Employees' Pension Scheme (EPS) form the foundation of a secure retirement for many employees. Both schemes are established under the Employees' Provident Fund & Miscellaneous Provisions Act of 1952. They are managed by a central board of trustees comprised of representatives from the government (central and state), employers, and employees. While closely linked, the EPF and EPS have distinct purposes and features.
What is an Employee Provident Fund (EPF)?
The provident fund scheme encourages individuals to save for their retirement. Both employees and their employers contribute to the employee's provident fund account. These contributions, along with earned interest, accumulate over the individual's working years. Upon retirement, the employee can a lump sum, providing essential financial support.
Your EPF investments earn regular interest, ensuring your retirement savings grow. For the 2023-24 financial year, the interest rate is 8.25%. Both employee and your employer must contribute 12% of employee’s basic salary (plus dearness allowance) to employees EPF account each month.
You can also add fixed deposits to your retirement planning; they offer guaranteed returns as their interest is not affected by market fluctuations.
Who is eligible for EPF?
- Employees of any establishment covered under Employees' Provident Fund Organisation (EPFO) are eligible for this savings scheme
- Enrolment is mandatory for organisations with more than 20 employees
- It is mandatory for salaried employees earning Rs. 15,000 per month or above
Is it possible to withdraw EPF before maturity?
Members can withdraw their EPF balance after retirement. After one month of retirement, you can withdraw 75% of your EPF funds, and the remaining 25% can be withdrawn after two months.
However, you may be able to withdraw some EPF funds before retirement in specific situations, such as:
- Marriage or children's education
- Home loan repayment
- Unemployment
Note: Withdrawing EPF funds before 5 years of continuous service may result in a 10% tax deduction.
What is the Employee Pension Scheme (EPS)?
The Employees' Pension Scheme (EPS) provides financial support to retired members of the EPFO. Employees do not directly contribute to EPS, instead, 8.33% of your employer's EPF contribution is directed towards your pension. If an employee's passes away, their nominee continues to receive the pension benefits. You become eligible to start receiving your EPS pension after reaching the age of 58.
Formula to calculate the monthly pension?
Monthly pension = (Average last 12 months salary x No. of years worked)/70
Is it possible to withdraw a lump-sum amount from EPS?
You can withdraw your EPS funds as a lump sum if either of these situations apply:
- You leave your job before completing 10 years of service.
- Upon reaching the age of 58.
Did you know?
Fixed deposits provide flexibility with tenures ranging from a few days to several years. This means you can align them with different financial goals.
What is a scheme certificate?
If you leave a job with less than 10 years of service and are under 58, you can opt for a scheme certificate. This certificate allows you to transfer your EPFO membership when starting a new job, ensuring your retirement benefits continue to grow. After completing a total of 10 years of service, you will receive the scheme certificate.
It is also helpful for family members to claim a family pension in the event of the member's death.
Is EPF or EPS account transferable?
The Employees Provident Fund Organisation (EPFO) assigns each member a Universal Account Number (UAN). This UAN remains same throughout the employee's career, providing access to their EPF account details. When changing jobs, providing your UAN to the new employer ensures continuation of your EPF contributions.
How EPS and EPF is calculated?
Employee contribution: You are required to contribute 12% of your basic salary + DA to your EPF account.
Employer contribution: Your employer matches your contribution with an additional 12%. However, the employer's contribution is further divided:
- 3.67% goes towards your EPF account
- 8.33% goes towards your EPS account
Let us understand this with an example
Let say your basic salary is Rs. 12,000 and your DA is Rs. 3,000
- Total salary for EPF: Rs. 12,000 + Rs. 3,000 = Rs. 15,000
- Your contribution (12%): Rs. 15,000 * 0.12 = Rs. 1,800
- Employer's EPF Contribution (3.67%): Rs. 15,000 * 0.0367 = Rs. 550.50
- Employer's EPS Contribution (8.33%): Rs. 15,000 * 0.0833 = Rs. 1,249.50
Conclusion
Both EPF and EPS are designed to aid employees in achieving financial security in retirement. By understanding how each scheme functions, the contribution rules, and the benefits they offer, you can help yourself make informed decisions about your future.
FDs can also be a valuable addition to your financial planning. Bajaj Finance FDs offer AAA-rated security and provide one of the highest interest rates, up to 8.85% p.a.
