EPF vs EPF - Difference and benefits

To help people save their hard-earned money and secure their future in the process, the Indian government has launched several saving and investment schemes. Two of the most popular ones are EPF ( Employee Provident Fund ) and EPS ( Employee Pension Scheme ).Both the schemes are framed under the Employee’s Provident Fund & Miscellaneous Provision Act, 1952, and help salaried individuals save and invest for their retirement. However, the working, features, and benefits of the schemes are very different. Take a look at what these government schemes are and how are they different from each other-

The Employees’ Provident Fund (EPF) scheme is a retirement benefits scheme for employees in the corporate sector. The employees and their employers regularly contribute towards the EPF scheme to help build a retirement corpus for the employees.The investment earns a fixed rate of interest that is regularly reviewed by the government. The current rate of interest for EPF is 8.5%.Here are some of the features of the EPF scheme-

• EPF contribution is mandatory for organizations that belong to the EPFO (Employee Provident Fund Organization) and have 20 or more employees with a minimum salary of Rs. 15,000.
• Any employee with a monthly income of more than Rs. 15,000 can voluntarily contribute to the EPF account.
• The retirement corpus can be withdrawn after the employee is 58 years or if he/she is unemployed for up to 60 days or more.
• A partial withdraw facility is available after 5 years of active service. However, partial withdrawals are only allowed for specific financial needs such as repaying a home loan, purchasing a house, higher education, marriage, etc.
• EPF enjoys EEE (Exempt, Exempt, Exempt) tax status. The investment, generated interest, and the benefit received is tax-free.

The employees and employers are required to contribute 12% of the employee salary (basic+dearness allowance) towards the scheme. However, while the entire employee contribution is contributed to EPF, only 3.67% of the employer's contribution is deposited into the EPF account. The rest is contributed towards EPS.Every employee who contributed to EPF is provided a UAN (Universal Account Number) which remains the same throughout their working life. Even if an employee changes jobs, the EPF amount can be transferred to another EPF account, but the UAN will remain the same.

EPF Monthly Contribution Example

Let us assume that an employee's monthly salary (basic + dearness allowance) is  Rs. 15,000, which is the basic threshold limit for EPF contributions. The employee's contribution would be 12% of Rs. 15,000, which comes to Rs. 1,800.The employer's contribution of 12% would be divided into 3.67% for EPF and 8.33% for EPS. So, the employer’s contribution to EPF would be 3.67% of Rs. 15,000, which comes to Rs. 550. Therefore, a salaried employee's total EPF contribution (employee+employer) with a monthly income of Rs. 15,000 would be Rs. 2,350 (Rs. 1,800+Rs. 550).

Salaried employees who are members of the EPFO and contribute to EPS (Employee Pension Scheme) receive a pension under the scheme. The employers of such employees regularly contribute to the EPS account. Contributions are made throughout the employee's working life, which is paid through pensions after 58 years.Unlike EPF, where both the employees and employers contribute, EPS contribution is only made by employers. Here are some of the top features of the EPS scheme-

• Employees cannot contribute to EPS.
• EPS contributions do not generate any interest.
• An early pension can be received after attaining 50 years of age.
• Lump-sum withdrawals can also be made after attaining 58 years or if the withdrawal is made in less than 10 years of service.
• EPS pays pension throughout the lifetime of the employee. On death, the policy nominee continues to receive the pension.
• Pension and lump-sum amounts received from EPS are taxable.

Employers contribute 8.33% of the 12% of an employee’s salary (basic + dearness allowance) to their EPS account. However, there is a cap of Rs. 1,250 (8.33% of Rs. 15,000) on the maximum amount that can be contributed towards the EPS scheme. Until 2014, the EPS contribution was capped at Rs. 541 (8.33% of Rs. 6,500). Subsequently, it was increased to Rs. 1,250.Employees can also check the EPS contributions made by the employers by visiting the EPFO portal and entering their UAN, which remains the same throughout the employee's working life even if they change jobs.

EPS Pension Calculation Example

The formula for calculating pension under EPS is (Pensionable Service x Average Salary)/70.Here, the pensionable service is the total number of years an employee has worked in the organized sector since 15thNovember 1995. The average salary is the average basic salary + dearness allowance received in the last 10 years.So, if we assume pensionable service of 35 years and an average salary of Rs. 15,000, the maximum pension under EPS would be Rs. 7,500 (35x15,000/70).

The biggest difference between EPF and EPS is highlighted below-

Both EPF and EPS are exceptional saving and investment schemes that allow salaried employees to secure their retirement life. As these are government-backed schemes, they offer the highest level of security and guaranteed benefits.If you’re concerned about building a secure future for yourself and your family, EPF and EPS can be excellent additions to your investment portfolio.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.