EPF, EPS and gratuity, and where the money actually goes
Why your employer's 12% does not all reach your PF, how the ₹15,000 pension ceiling caps EPS, and the gratuity formula that uses 26 days rather than 30.
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In short
- You contribute 12% of basic to EPF. Your employer also contributes 12%, but 8.33% of it is diverted to the pension scheme, capped at ₹15,000 of salary.
- On a ₹40,000 basic from 30 to 58 with 7% increments, the EPF corpus reaches about ₹2.85 crore — ₹1.91 crore of it interest.
- Gratuity uses 15 days of pay per year of service, divided by 26 rather than 30, which makes the effective factor 0.577 of a month.
- Gratuity is capped at ₹20 lakh. A permanent employee needs five years of continuous service; since 21 November 2025 a fixed-term employee needs one, and death or disablement needs none.
- EPF interest becomes taxable on contributions above ₹2.5 lakh a year, which affects high earners and anyone making large voluntary contributions.
Two separate benefits accumulate quietly through a salaried career in India, and most people discover how they work only when they leave a job.
Where the contributions go
Both you and your employer contribute 12% of basic salary plus dearness allowance. The two halves do not go to the same place.
| Contribution | Rate | Destination |
|---|---|---|
| Employee | 12% | EPF entirely |
| Employer | 3.67% | EPF |
| Employer | 8.33% | EPS, the pension scheme |
The employer's 8.33% is capped at a salary of ₹15,000, so the maximum ever diverted to EPS is about ₹1,250 a month. On a higher salary the balance of the employer's 12% goes to EPF instead.
On a ₹40,000 basic: you contribute ₹4,800, your employer contributes ₹4,800, of which ₹1,250 goes to EPS and ₹3,550 to EPF. Your EPF therefore receives ₹8,350 a month and EPS ₹1,250.
The employer also pays 0.5% towards the deposit-linked insurance scheme, which provides a death benefit and does not accumulate to your account.
What it builds
At a ₹40,000 basic from age 30 to 58, with 7% annual increments, an opening balance of ₹5,00,000 and interest at 8.25%:
| Component | Amount |
|---|---|
| Total contributed | ₹88,76,542 |
| Interest earned | ₹1,91,03,548 |
| EPF corpus at 58 | ₹2,84,80,090 |
| EPS accumulation | ₹4,19,832 |
Interest is more than twice the contributions. The reason is the same as everywhere in compounding: 28 years is a long time, and 8.25% is a high guaranteed rate — higher than any bank deposit and, being tax-free within limits, higher still on a post-tax basis.
Note how small the EPS column is. Capped at ₹1,250 a month, the pension scheme accumulates a fraction of what EPF does, and its eventual pension is calculated by formula rather than from the accumulation.
The EPS pension formula
monthly pension = (pensionable salary × pensionable service) ÷ 70
Pensionable salary is the average of the last 60 months, capped at ₹15,000 unless you opted for a higher pension under the Supreme Court's 2022 judgment. Pensionable service is capped at 35 years.
At the cap, the maximum pension is 15,000 × 35 ÷ 70 = ₹7,500 a month. That is the ceiling for almost everyone in the scheme, whatever they earned.
Ten years of service is the minimum for any pension. Below that, the EPS balance can be withdrawn as a lump sum; above it, only the pension is available and it starts at 58.
Gratuity, and the 26-day divisor
Gratuity is a separate statutory payment for completing five years with an employer.
gratuity = last drawn salary × 15 ÷ 26 × years of service
Salary here is basic plus dearness allowance. The 26 is the number of working days in a month under the Payment of Gratuity Act, which excludes Sundays. Dividing 15 by 26 gives 0.577, so each year of service earns just over half a month's pay — not half, and not fifteen days out of thirty.
Using 30 instead of 26 understates gratuity by 13%, which is a common spreadsheet error.
Service is rounded to the nearest year, with more than six months counting as a full year: 10 years 7 months counts as 11, and 10 years 5 months counts as 10.
On the salary above, 10 years of service gives ₹15,34,347. Fifteen years gives ₹20,00,000 — the statutory maximum, which is reached at that salary somewhere around thirteen years and caps everything beyond it.
The five-year rule and its exception
Five years of continuous service with the same employer is required. Changing jobs at four years and eleven months forfeits it entirely, and it does not carry across employers.
The exception is death or disablement, where gratuity is payable regardless of length of service.
Courts have held that a year of 240 working days counts as a full year for this purpose, and in establishments working a five-day week the threshold is 190 days. This has allowed some claims at four years and about eight months to succeed, though it is contested and depends on the establishment.
Tax treatment
EPF is exempt-exempt-exempt if you complete five years of continuous service, counting service across employers where the account is transferred rather than withdrawn. Withdraw before five years and the entire amount — your contribution, the employer's, and the interest — becomes taxable, with the employer's share taxed as salary.
Since 2021, interest on contributions above ₹2,50,000 in a year is taxable, or ₹5,00,000 where the employer makes no contribution. This affects high earners and anyone making large voluntary contributions.
Gratuity is exempt up to ₹20,00,000 for private sector employees, and entirely exempt for government employees. The limit is a lifetime one across all employers.
EPS pension is taxable as salary income when received.
Transferring rather than withdrawing
The single most consequential decision on changing jobs.
Transfer the EPF account to the new employer through the UAN portal. Service is treated as continuous for the five-year rule, the balance keeps earning, and the compounding continues.
Withdraw and three things happen: the balance stops compounding, the five-year clock resets, and if you were under five years the whole withdrawal becomes taxable.
Withdrawing ₹5,00,000 at 30 rather than transferring it costs, at 8.25% for 28 years, roughly ₹46 lakh at 58. That is the real price of a withdrawal that felt like accessing your own money.
The UAN makes transfer nearly automatic now, and it happens by default in many cases — but it is worth confirming rather than assuming.
Voluntary provident fund
You may contribute more than 12% through VPF, up to 100% of basic, at the same 8.25% guaranteed rate. The employer's contribution does not increase.
At 8.25% tax-free within the ₹2.5 lakh interest threshold, VPF is the highest guaranteed return available to a salaried Indian — better than PPF's 7.1% and far better than any deposit. The constraints are the lock-in until retirement or resignation, and the ₹2.5 lakh limit above which the interest becomes taxable.
For someone already contributing ₹1.5 lakh a year through the statutory 12%, there is room for another ₹1 lakh of VPF before the interest ceases to be exempt.
Higher pension under the 2022 judgment
The Supreme Court's November 2022 ruling allowed certain employees to opt for a pension calculated on actual salary rather than the ₹15,000 ceiling.
The arithmetic is substantial. On a pensionable salary of ₹50,000 with 30 years
of service, the formula gives 50,000 × 30 ÷ 70 = ₹21,429 a month against
₹6,429 at the ceiling.
The cost is equally substantial: the additional 8.33% on the full salary must be transferred from the EPF corpus to EPS retrospectively, with interest — frequently tens of lakhs, taken out of a balance that would otherwise have been withdrawable as a lump sum.
The choice is therefore between a larger guaranteed lifetime pension and a larger accessible corpus. It favours those with long remaining service, good health and no immediate need for the lump sum, and it disfavours anyone who would invest the corpus themselves. The window to apply has opened and closed several times and the position remains unsettled, so the current status is worth checking rather than assuming.
Withdrawing before retirement
Partial withdrawal from EPF is permitted for specified purposes, each with its own service requirement and limit.
| Purpose | Service needed | Limit |
|---|---|---|
| Illness | None | Six months of basic, or employee share |
| Marriage or education | 7 years | 50% of employee share |
| House purchase or construction | 5 years | Up to 36 months of basic plus DA |
| Home loan repayment | 10 years | Up to 36 months of basic plus DA |
| Retirement, one year before | 54 years | 90% of the balance |
Unemployment allows 75% after one month and the remainder after two, which is what the scheme's emergency provision is for.
Every one of these is a withdrawal from the highest guaranteed tax-free return available to a salaried Indian, and it does not come back. Use them where the alternative is expensive debt, and not otherwise.
What this calculator assumes
- Contributions at the statutory 12% each, with the employer's share split 8.33% to EPS capped at ₹15,000 of salary.
- Basic salary rising at the increment rate you set, with interest credited annually.
- Gratuity using the 15/26 formula on the final basic, capped at ₹20 lakh.
- Service rounded to the nearest year, with more than six months counting as a full year.
- The EPF interest rate is set annually by the government and is assumed constant here.