Employees' Pension Scheme (EPS), 1995

The Employees' Pension Scheme, or EPS, is a scheme that gives a monthly pension to workers who are members of the EPFO. It is paid after retirement, and also to the family if the worker dies. The money comes from a part of the employer's PF contribution, plus a small share from the Central Government. The worker does not pay anything directly into EPS.

Why does it exist?

A lump-sum PF amount can run out in a few years after retirement. Elderly people need a steady income every month, like a salary that continues. EPS gives this. It also protects families: if the earning member dies, the spouse and children get a pension.

Where did it come from?

Before 1995, the EPFO ran a Family Pension Scheme, 1971. It only gave pension to the family after a member's death. In 1995, the government replaced it with the Employees' Pension Scheme. EPS came into force on 16 November 1995. It covers both retirement pension and family pension. The biggest change came on 1 September 2014:

• The salary limit for pension (pensionable salary) went up from ₹6,500 to ₹15,000.
• A minimum pension of ₹1,000 a month was fixed.
• Members who joined after this date with wages above the ceiling were kept out of EPS.

How is it funded?

Out of the employer's 12% PF contribution, 8.33% goes to EPS. This is calculated only on wages up to the ceiling. So at a ₹15,000 ceiling, the maximum was ₹1,250 a month. At the new ₹25,000 ceiling, it becomes about ₹2,083 a month. The Central Government also contributes 1.16% of wages (up to the ceiling) to the pension fund.

How is the pension calculated?

EPS uses a simple formula:

Monthly pension = (Pensionable salary × Pensionable service) ÷ 70

• Pensionable salary is the average monthly wage (basic plus DA) of the last 60 months, subject to the ceiling.
• Pensionable service is the number of years of service during which EPS contributions were made.

Example: a worker with an average pensionable salary of ₹15,000 and 30 years of service gets (15,000 × 30) ÷ 70, which is about ₹6,428 a month. If the formula gives less than ₹1,000, the minimum pension of ₹1,000 is paid.

Who gets what?

• Superannuation (retirement) pension: at age 58, if the member has at least 10 years of service.
• Early pension: from age 50, but at a reduced rate for each year before 58.
• Deferred pension: a member can choose to start pension later, up to 60, and get a higher amount.
• Widow or widower pension: paid to the spouse if the member dies.
• Children's pension: 25% of the widow pension for each child, for up to two children at a time.
• Orphan pension and disabled member pension also exist.
• If a member leaves with less than 10 years of service, they can take a withdrawal benefit (a lump sum) instead of pension.

The higher pension case

Some employees wanted pension on their full salary, not just up to the ceiling. In EPFO v. Sunil Kumar B (4 November 2022), a three-judge bench of the Supreme Court largely upheld the 2014 changes. But it struck down the rule that asked members to pay an extra 1.16% on salary above ₹15,000. It also gave eligible members a fresh chance to opt for a higher pension based on their actual wages. The EPFO then opened an online window for such applications in 2023.

Commonly confused concepts

• EPS vs EPF: EPF is your savings, returned as a lump sum with interest. EPS is a pension fund; you do not get "your money" back as a balance, you get a monthly pension by formula.
• EPS vs Atal Pension Yojana (APY): APY is a government pension scheme for unorganised sector workers, where the worker pays in. EPS is linked to formal employment and funded by the employer and the Centre.
• EPS vs NPS: EPS is defined-benefit (the formula fixes the pension). NPS is defined-contribution (the pension depends on savings and market returns).
• Pensionable salary vs actual salary: Pension is calculated on salary only up to the ceiling, not on the full salary.

Issues, criticism and the way forward

• Very low pension: The ₹1,000 minimum has not changed since 2014. Pensioner groups have long demanded a much higher minimum, such as ₹7,500 a month.
• Low salary base: Because pension is calculated only up to the ceiling, many workers get a small pension compared to their last salary.
• Financial strain: Experts have raised concerns about whether the fund can keep paying promised pensions in the long run, since the formula fixes benefits regardless of returns.
• Complex rules: The higher-pension process after the 2022 judgment created confusion and many pending cases.
• Way forward: Suggestions include regular, rules-based revision of the ceiling and minimum pension, and a regular actuarial check (a check of whether future money will be enough to pay future pensions).

Concepts to Know

• Superannuation: Retirement on reaching the fixed age, after which pension begins.
• Pensionable service: The years of work counted for calculating pension.
• Actuarial valuation: A study by experts that checks whether a pension fund will have enough money to pay all future pensions.
• Ultra vires: A Latin term meaning "beyond the legal powers". A rule declared ultra vires is not valid.