What is EPF and what is EPS? Know the difference and where to invest

EPF vs EPS: Each month, a portion of an employee’s salary in the private sector is allocated towards the Provident Fund (PF) or pension. This deduction often raises questions regarding the destination of the funds. The monthly deductions for salary and investments are directed towards the Employee Provident Fund (EPF) and the Employee Pension Scheme (EPS). However, many individuals are unaware of the distinctions between EPF and EPS, leading to uncertainty about whether their salary deductions are being allocated to EPF or EPS.

Financial security upon retirement

When contemplating retirement, employees in India typically consider two primary schemes: EPF and EPS. Both schemes are designed to offer financial security upon retirement, yet they do so in different manners.

Let’s understand the difference

The EPF is a retirement savings initiative established under the Employees’ Provident Fund and Miscellaneous Provisions Act of 1952. It serves as a savings mechanism for employees in the organized sector, overseen by the Employees’ Provident Fund Organization (EPFO). Contributions to the EPF are made monthly by both the employee and the employer. Funds accumulated in the EPF can be withdrawn upon retirement or under specific circumstances. Conversely, the EPS, which is also part of the EPF and Miscellaneous Provisions Act of 1952, operates differently; it does not provide a lump sum payment at retirement. Instead, the EPS offers a pension to the employee post-retirement, with the pension amount determined by the employee’s salary and years of service.

As noted on Axis Bank’s website, the EPF contribution comprises 12% of the employee’s basic salary plus the dearness allowance (DA) from both the employee and employer. In contrast, the employer contributes 8.33% to the EPS. There is no cap on contributions to the EPF, as it is entirely salary-based, while the EPS applies only to salaries exceeding 15,000.

All individuals employed in the organized sector earning a salary of up to 15,000 rupees are eligible for inclusion in the Employees’ Provident Fund (EPF). Additionally, others may voluntarily opt to participate in the EPF. Concurrently, the Employees’ Pension Scheme (EPS) is compulsory for those whose monthly salary does not exceed 15,000 rupees.