Employee Pension Scheme
Also written EPS · Employees Pension Scheme · EPS-95
A government-guaranteed pension scheme funded by diverting 8.33% of the employer's EPF contribution, plus a 1.16% central government top-up, paying members a lifelong pension from age 58.
In plain language
When an employer pays into an employee's provident fund, not all of that money stays in the provident fund. A slice is siphoned off into a separate scheme designed to pay a pension for life, not a one-time lump sum.
That separate scheme is the Employee Pension Scheme, run by the EPFO and guaranteed by the government.
How it works
EPS is funded by diverting 8.33% (subject to limits) of the employer's EPF contribution — not an additional amount from the employee, but a carve-out from what the employer already pays toward EPF. The central government also contributes 1.16% of wages to the scheme.
The scheme provides pensions for life to members, or to their family, from the age of 58.
Eligible members may separately be subject to higher-pension options under EPS-95, based on EPFO circulars and judicial directions current at the time — the workbook advises checking the latest EPFO guidance before advising on such cases, since this area has been actively litigated and revised.
A worked example
Mr Bose earns a basic salary plus DA of Rs 20,000 a month. His employer's total EPF contribution is 12% of that — Rs 2,400 a month. Of this Rs 2,400, 8.33% of the wage base (subject to the applicable EPS wage ceiling) is diverted into the Employee Pension Scheme rather than staying in his EPF balance, and the central government separately adds 1.16% of his wages into EPS.
By the time Mr Bose reaches age 58, his years of EPS contributions entitle him to a pension for life, paid monthly by the EPFO — a benefit entirely distinct from the lump sum he separately draws from his EPF account balance.
Why NISM asks about it
Chapter 6, section 6.1, presents EPS immediately after the EPF Scheme, and the two are frequently tested as a pair — which percentage goes where, and which produces a lump sum versus a lifelong pension. Expect the 8.33% diversion figure, the 1.16% government top-up, and the age 58 pension start age as direct recall points.
Common exam traps
- The 8.33% comes out of the employer's existing EPF contribution — it is not an extra amount on top of the standard 12%. A common error treats it as an additional employer cost.
- 1.16% is the central government's own top-up to EPS, separate from anything the employer or employee pays.
- EPS pays a lifelong pension from age 58; the EPF scheme pays a lump sum on retirement. Confusing the payout form of the two schemes is the most frequent error in this pair.
- EPS-95 higher-pension options are subject to ongoing EPFO circulars and court rulings — the workbook deliberately does not give a fixed rule here, and advisers are told to check current guidance rather than rely on a memorised figure.
Check yourself
1.Where does the money for the Employee Pension Scheme come from?
- a)A fresh contribution of 8.33 percent by the employee
- b)8.33 percent DIVERTED from the employer's contribution to the EPF, plus 1.16 percent of wages from the Central Government
- c)A matching contribution of 12 percent by both employer and employee
- d)Entirely from the Central Government at 8.33 percent of wages
Show the answer
Answer: (b) 8.33 percent DIVERTED from the employer's contribution to the EPF, plus 1.16 percent of wages from the Central Government
"8.33 PERCENT (SUBJECT TO LIMITS) FROM THE EMPLOYER'S CONTRIBUTION TO THE EMPLOYEE PROVIDENT FUND (EPF) IS DIVERTED TO THE EPS. THE CENTRAL GOVERNMENT ALSO CONTRIBUTES 1.16 PERCENT OF THE WAGES."
⚠️ The word DIVERTED carries the whole answer. Nothing extra is contributed by the employer — of its existing 12 percent, a slice funds a lifetime pension and the remainder builds the provident fund lump sum. The only genuinely new money is the government's 1.16 percent.
The scheme is run by the EPFO and IS GUARANTEED BY THE GOVERNMENT, providing pensions for life to members or their family upon retirement AT THE AGE OF 58 — an age worth noting, since it differs from the 60 that governs almost everything else in this workbook.
On higher pension claims, the workbook is deliberately open-ended: eligible members may be subject to additional options under EPS-95 based on EPFO circulars and judicial directions, and ADVISERS SHOULD REFER TO THE LATEST EPFO GUIDANCE.
2.Which statement about the Employees' Deposit Linked Insurance Scheme (EDLI) is correct?
- a)8.33 percent of the employer's EPF contribution is diverted to it, and it pays a pension for life from age 58
- b)The central government contributes 1.16 percent of wages to it
- c)The employer contributes 0.5 percent of total wages, the employee contributes nothing, and on death in service the nominee receives an assurance benefit in addition to the provident fund
- d)Employer and employee each contribute 0.5 percent of wages, and the benefit is paid on retirement
Show the answer
Answer: (c) The employer contributes 0.5 percent of total wages, the employee contributes nothing, and on death in service the nominee receives an assurance benefit in addition to the provident fund
EDLI: "EMPLOYER CONTRIBUTES 0.5 PERCENT OF THE TOTAL WAGES. NO CONTRIBUTION IS MADE BY THE EMPLOYEE. The benefit provided under the Employees' Deposit Linked Insurance Scheme is called ASSURANCE BENEFIT. On the DEATH OF THE MEMBER WHILE IN SERVICE, the nominee or any other person entitled to receive the provident fund benefits will, IN ADDITION TO THE PROVIDENT FUND, receive the assurance benefit."
Why the others are wrong — they describe the Employee Pension Scheme (EPS):
- "8.33 percent (subject to limits) from the employer's contribution to the EPF is diverted to the EPS", which "provides pensions for life to members or their family upon retirement at the age of 58."
- "The central government also contributes 1.16 percent of the wages" — again to the EPS.
- The last option invents an employee contribution and a retirement payout; EDLI is funded by the employer alone and pays on death in service.
Where this is taught
Free preparation for NISM Series XVIIRelated terms
- GratuityA lump sum an employer must pay under the Payment of Gratuity Act, 1972 on termination after at least five years of continuous service, a condition waived on death or disablement.
- Defined Benefit (DB) schemeA retirement scheme where the pension amount is fixed in advance, usually as a percentage of last-drawn salary, regardless of how the underlying investments perform.
- Employee Deposit-Linked Insurance SchemeA mandatory, employer-funded life insurance benefit for EPF members, paying an assurance benefit to the nominee on top of the provident fund balance if the member dies while in service.
- Employee Provident FundA mandatory retirement savings scheme where employer and employee each contribute 12% of basic pay, credited to the employee's own account and paid out as a lump sum at retirement.
- Employees Pension Scheme shareThe 8.33% slice of the employer's 12% EPF contribution that is diverted into EPS instead of the employee's own provident fund balance — capped by a Rs 15,000 monthly wage ceiling, and earns no interest.