Employee’s Provident Fund (EPF) and Employee’s Pension Scheme (EPS) are both saving schemes introduced by the government of India. While EPF involves contributions from both the employer and employee, EPS includes contribution only from the employer. Both these schemes accumulate funds from a part of the employee’s basic salary and dearness allowance.
Continue reading this blog to learn how both these schemes work and what are the major differences between them!
What is EPF? How does EPF work?
EPF or Employees’ Provident Fund is a government scheme set up by the EPFO under the guidance of the Ministry of Labor & Employment. The idea behind this scheme is to promote a sense of savings among the employees and to help them build a sufficient retirement corpus for their well being.
Under the EPF scheme, both the employers and employees contribute 12% of the employee’s basic salary and dearness allowance to EPF. Similarly, 12% of the employee’s salary is deducted by the employer as a monthly contribution towards EPF. There are innumerable benefits and multiple services offered by the EPFO for the betterment of the retirement of the employees.
Under the EPF scheme, the employer and employee both contribute 12% of the employee’s salary and dearness allowance. However, it must be noted that while the entire 12% of the employee’s contribution goes to EPF, only 3.67% of the employer’s contribution goes to the employee’s EPF account. The remaining share is contributed to the employee’s EPS account.
Moreover, employees get an interest of 8.5% on the accumulated corpus. While the employees can withdraw this amount only upon their retirement, it is still possible for them to withdraw a part of their EPF corpus in case of any emergencies, under certain conditions. While it is possible to withdraw the EPF corpus before retirement, it is still advised that you do not do so. This is because early withdrawals from the EPF are not a part of the tax-deductible income of the employees. It is, instead, a taxable income if withdrawn before retirement. Hence, it is better to let the corpus accumulate and withdraw it only after retirement and not before that.
EPF Eligibility Conditions
Following conditions must be met by an employee to be eligible for EPF withdrawal–
- The total corpus accumulated in the EPF account can be withdrawn only upon retirement of the employee (Note that early retirement is also possible only after 55 years of age and not before that)
- Employees can withdraw 90% of their EPF corpus before 1 year of their retirement
- Considering the COVID-19 pandemic or similar situations when there might a lockdown in the entire country, EPFO has allowed withdrawal of EPF if an employee faces unemployment before retirement due to lockdown or retrenchment
- The new rules laid down by the EPFO also state that only 75% of the total EPF corpus can be withdrawn after 1 month of unemployment, while the remaining will be transferred to the new EPF after gaining employment
- Employee who link their UAN and Aadhaar to their EPF account can seek approval for EPF withdrawal from their employers online
- Employees must have their active UAN, bank details linked with their active UAN and details of their Aadhaar and PAN as seeded into the EPF database
Benefits of EPF
Following are the benefits of having an EPF account–
- The use of EPFO allows easy redressal to compliance and grievance for employees
- Since the Employees’ Provident Fund is governed by a statutory body, it is mandatory for all organizations to follow all rules and regulations set up by EPFO on a daily basis
- EPFO makes the availability of online services available easily
- With the help of EPF, the claim settlement time has been reduced from 20 days to 3 days
- EPF facilitates the promotion and encouragement of all sorts of voluntary compliance
- For employees, EPF allows them to save a lot of money in the long run
- Monthly contribution to EPF makes it easier for working professionals to save a good amount of money for their requirement, as they do not have to take out a lump sum amount for investment
- Employees can also withdraw a part of their EPF at the time of emergencies
- EPF works as a reliable source of long term investment for employees, whilst building a retirement corpus for them
- The part of an employee’s salary that is deducted towards EPF is a part of his/her non-tax deductible income
- Employees can transfer their EPF corpus from one employer to another as and when they switch jobs
- EPF is a major tax-saving instrument
What is EPS? How does EPS work?
EPS or Employee Pension Scheme is a savings scheme backed by the government of India with the intent to offer pension to the employees after their retirement. Under this scheme, the employer contributes 8.33% of 12% of the employee’s basic salary and dearness allowance. It must be noted that the maximum amount that an employer can contribute to the employee’s EPS account is Rs. 1,250.
It is important to note that employees are not allowed to contribute to their EPS account; it is employer’s who can contribute to the employee’s EPS account. Employees can avail this amount as a pension after they have attained 50 years of age and have completed 10 years of service. Just like EPF, employees can check the available balance in their EPS account on the EPFO portal using their UAN.
EPS Eligibility Conditions
An employee must fulfill the following eligibility conditions to be able to receive the EPS amount-
- The employee must be a member of the EPFO
- The employee must have completed at least 10 years of service
- The employee must be at least 58 years of age
- If an employee decides to take the pension amount after reaching 60 years of age, he/she will be eligible to receive the pension amount with an additional interest at the rate of 4%
Benefits of EPS
Following are some of the major benefits of the EPS scheme-
- Employees receive the additional benefit of pension
- EPFO members (eligible employees) are offered lifelong pension
- In case of sudden demise of the employee, the pension benefits are provided to the family members of the employee
- Eligible employees can withdraw their entire pension amount upon being unemployed for a duration of 2 months or more
EPF vs EPS – The Difference
Listed below are some of the major differences between EPF and EPS-
|Deposit Limit||Predetermined Limit||Rs. 1,250 (Maximum)|
|Withdrawal Age Limit||Not required||Minimum 10 years of service & 50 years of age for early pension, and 58 years of age for regular pension|
|Rate of Interest||Interest received is exempted||No interest rate is applied|
|Withdrawal of funds||Either after 58 years of age, or after 60 or more days of unemployment||After 58 years of age|
|Premature withdrawal amount||Complete EPF balance can be withdrawn||Based on the total years of service|
|Tax Benefit||Deduction of upto Rs. 1.5 lakh||No tax deduction is allowed|
|Limit on deposit amount||Fixed at 12% of employee’s salary||Limited to 8.33% of employee’s salary; maximum of Rs. 15,000|
Wrapping it Up:
While there are multiple differences between EPF and EPS, both of them offer innumerable benefits to employees. Both, EPF and EPS are saving schemes introduced by the government of India to promote savings and easier financial situations for employees after their retirement. Both these schemes involve absolutely no risk of loss and provide reasonable interest on the amount accumulated. To conclude, it can be said that the major difference between EPF and EPS as saving schemes is that in EPF, both the employer and employee contribute a part of the employee’s salary, whereas in EPS, only the employer contributes and the employee does not.