Overview
The Employees’ Pension Scheme, 1995 (EPS) is a social security scheme in India that provides a pension (monthly income) to employees of the organized sector after their retirement, as well as to their widows/widowers, children, and nominees in case of death. The EPS operates under the umbrella of the Employees’ Provident Fund Organization (EPFO) and is supported by contributions made during the employee’s working years. It was introduced in 1995 by amending the EPF Act, effectively replacing the earlier Family Pension Scheme of 1971 with more enhanced benefits. While the EPF (Provident Fund) is a lump-sum retirement benefit, EPS is designed as an annuity – ensuring a lifelong pension which addresses longevity risk (outliving one’s savings).
Contribution and Funding
The funding for EPS comes primarily from a diversion of the employer’s contribution under the EPF Act. Here’s how it works:
• Both employer and employee contribute 12% each of the employee’s basic wage + dearness allowance (subject to wage ceilings) towards EPF each month. However, the employee’s entire 12% goes to their EPF account, whereas the employer’s 12% is split: 8.33% is routed to EPS (subject to a maximum of ₹1,250 per month, because the scheme historically capped the pensionable salary at ₹15,000 per month), and the remaining (12% – 8.33% = 3.67%) goes into the EPF account.
• The Central Government also contributes 1.16% of the employee’s wage (again, up to the wage ceiling) to the EPS every month as a subsidy. This was to shore up the pension fund, given that EPS is a defined benefit scheme. There are talks that for those opting higher pension on actual salary beyond the cap, this gov’t contribution may be altered.
The wage ceiling for EPS contributions was ₹6,500 per month until Aug 2014, then raised to ₹15,000 per month. This means, by default, contributions to EPS are calculated only on wages up to ₹15,000, even if someone earns more; any salary beyond ₹15k doesn’t attract EPS contribution (the excess of employer share goes to EPF). However, employees and employers had an option (if jointly applied earlier) to contribute on higher actual salary to EPS – which would increase eventual pension – but historically very few exercised it and EPFO had unclear implementation for those who did; this became a legal issue (discussed below in developments).
Eligibility and Vesting
• Membership: Any employee who is a member of EPF (i.e., working in a covered establishment) automatically becomes a member of EPS, provided they joined EPF before the age of 58. (If someone joins at 58 or above, they won’t contribute to EPS, their entire 12% employer share goes to EPF). Also, EPS membership stops at 58 for contributing, but can defer pension till 60.
• Minimum Service: To become eligible for monthly pension, a member must have completed at least 10 years of “eligible service” by the time they attain the age of 58. Eligible service can include certain periods of disablement, merged companies service, etc., but typically it’s the years of contribution. The 10-year requirement is waived if the member dies or becomes permanently disabled – in those cases, pension is payable even if total service was less (with some minimum).
• Withdrawal Benefit: If a member leaves employment or retires before completing 10 years of service (or before age 58 without meeting criteria), they are not eligible for monthly pension but can withdraw the pension fund balance as a lump sum (technically called “Withdrawal Benefit”). There is a formula for that based on last salary and service years, but it’s usually not very large. Alternatively, if between 10 and 20 years and one doesn’t want to withdraw, one can choose scheme certificate (keeping the pension rights deferred for future, especially if one might join another EPF job later).
• Age of Pension: The standard age for claiming pension is 58 years. One can opt for an early pension from age 50 onwards if one has left service, but it will be at a discounted rate (4% reduction for each year early, so at 50, the pension would be reduced by 25%). One cannot get pension before 50 (except for disablement or survivor pension to family). If one delays taking pension beyond 58 (and continues maybe to contribute till 60), one could get it slightly increased (4% more for each year deferred after 58 up to 60).
Pension Benefits
• Monthly Pension to Member (Superannuation Pension): For someone retiring at 58 with at least 10 years of service, the pension amount is determined by a formula:
Pension = (Pensionable Salary * Pensionable Service) / 70.
Here, Pensionable Salary is the average monthly salary of the last 60 months of service (prior to 2014, it was last 12 months). If one never exceeded the wage cap, it effectively becomes ₹15,000 (assuming last 5 years one earned ₹15k or more). Pensionable Service is the number of years of service, rounded down to nearest year (and there was a grace of 2 years given if one had more than 20 years service). So, someone with 30 years of service and a pensionable salary of ₹15,000: Pension = (15000 * 30) / 70 = ₹6,428 per month roughly. If 10 years service: (15000 * 10)/70 = ₹2,142 per month. The minimum pension was set as ₹1,000 per month since 2014, as earlier many got even lower. There’s a maximum theoretically if one had higher salary contributions, but since ₹15k cap, the usual max is around ₹7,500 (for 35 years service: (15000*35)/70 = ₹7500).
The amount isn’t index-linked, so inflation erodes it. However, government occasionally may approve small increases or minimum pension hikes.
• Widow(er) Pension: If a member dies (whether in service or after, provided not already commuted pension fully), their spouse is entitled to a pension at 50% of the member’s entitled pension, or a minimum of ₹1,000. This continues for life or until remarriage (in case of widow). If there are more than one widow, it’s shared.
• Children Pension: Along with the widow pension, children (up to two at a time) get 25% of the member’s pension each until age 25. Orphan pension (if no surviving parent) is 75% of member’s pension to each orphan (again up to two, until 25). Disabled child gets it for life regardless of age.
• Nominee/Dependent Pension: If a member dies unmarried or has no eligible family, the nominee (whom the member nominated) gets the pension equivalent to what widow would have gotten, for life. If no nomination, then dependent parents get it.
• Disablement Pension: If a member becomes permanently and totally disabled during service, they are entitled to pension regardless of service length (even if less than 10 years). They need to be an EPF member on date of disablement. The pension is calculated as normal with actual service, but there’s a provision to treat as if they had 2 extra years of service.
The EPS pension is not commutable (except a small option to take lump sum if pension would be below minimum, but practically no). It also does not have DA increases, so it’s fixed amount.
Recent Developments and Challenges
EPS has faced funding challenges because it’s a defined benefit scheme with contributions capped at relatively low wage ceilings. Many argue the pension is too low to be meaningful, especially for anyone who earned above the cap. Also, inflation has reduced its value (₹1000 minimum is meager).
A significant development was the issue of higher pension on actual salary. There were court cases (notably the Supreme Court judgement of Nov 2022 in EPFO vs Sunil Kumar & others) about employees who were allowed to contribute to EPS on full salary (above the cap) and thus claim a higher pension. EPFO had tried to limit it citing sustainability, but courts ruled that employees and employers who contributed on higher wages (or who missed the formal option due to lack of information when the 2014 amendments came) should be given a chance to opt in and contribute the difference to receive higher pension. Following the SC judgement, EPFO opened applications (till May 2023) for eligible employees (primarily those who were EPF members as on 2014 and either opted earlier or could now opt) to elect higher pension, which involves paying additional contributions (8.33% of the portion of salary beyond ₹15k for past years, which can be adjusted from their EPF balance). This has been a complex process and has cost implications for EPFO. From an HR perspective, companies had to inform and assist eligible employees/retirees with this option.
The Code on Social Security, 2020 includes provisions to continue a pension scheme similar to EPS, possibly with tweaks (like adjusting the government contribution if wage ceiling is removed). So EPS or its successor is likely to continue as the mainstay for organized sector pensions.
Importance for Employees and Employers
For employees, especially those in lower wage brackets or those who spend an entire career in EPF-covered establishments, EPS is a valuable safety net providing a steady income in old age, supplementing their lump-sum EPF. It’s effectively an annuity with implicit government backing. The drawback is low payout for many and complexity in understanding benefits.
For employers, EPS is part of the statutory cost (the 8.33% of wages portion). It doesn’t change the total 12% EPF outgo, but if more employees opt for higher pension, employers may worry about any retrospective contributions or higher outgo (though EPFO said extra will be from employee EPF adjustment mostly). Employers also play a role in certifying wages and joint option forms for employees opting higher pension, meaning more admin work.
HR needs to ensure that when employees leave, they are advised about their EPS options (if not 10 years, withdrawal benefit; if crossing 10, then either keep contributing via new job or take scheme certificate if not yet 58; at retirement, assist in claiming pension). Many retiring employees have confusion about paperwork to claim pension (like submitting Form 10D).
In summary, EPS is a crucial component of India’s social security for formal workers, albeit with modest benefits. It highlights the broader issue of retirement adequacy and has been subject to reforms and judicial scrutiny. Understanding EPS is important for both employers and employees to make the most of the scheme’s provisions and to be aware of their long-term financial planning regarding pension income.
