The normal pension age for earnings-related pension benefits from the Employees’ Pension Scheme is 58 years with a minimum of ten years of contributions. The pension age for the earnings-related Employees Provident Fund scheme is 58 years.

About 12% of the workforce (or approximately 58 million people) are covered under various pension systems according to the 2011 census. Covered individuals belong to the organised sectors and are employed by the government, government enterprises, public and private sector enterprises, which are mandatorily covered by the Employees Provident Fund Organization (EPFO). Employers with 20 or more employees are covered by EPFO.

The remaining 88% of the workforce are mainly occupied in the unorganised sector (self-employed, daily wage workers, farmers etc.) and some are in the organised sector, but are not mandatorily covered by the EPFO. For this share of the workforce the Public Provident Fund (PPF) and Postal Saving Schemes have traditionally been the main long-term savings instruments, but these have only catered to a relatively small section of this population.

Employees Provident Fund Schemes (EPF)

For employees with basic wages less than or equal to INR 15 000 per month, the employee contributes 12% of the monthly salary and the employer contributes 3.67%. This combined 15.67% accumulates as a lump-sum.

For employees with basic wages greater than INR 15 000 per month, the employee contributes 12% of the monthly salary and the employer also contributes 12%. This combined 24% accumulates as a lump-sum.

There is no annuity and full accumulations are paid on retirement after attaining 55 years of age. For comparison with other countries, for replacement rate purposes the pension is shown as a price-indexed annuity based on sex-specific mortality rates.

Employees’ Pension Scheme (EPS)

Starting from September 2014 new members with basic wage above INR 15 000 per month no longer have the option of contributing to the EPS. Existing participants who have until now been contributing over the earlier INR 6 500 wage cap have an option to continue contributing over the increased wage cap of INR 15 000 but they would also have to contribute the government subsidy of 1.16% on the excess amount.

For the existing and new subscribers who are within the new basic wage cap of INR 15 000, the employer contributes an amount equal to 8.33% of the basic wage to the EPS fund and the Central Government contributes a subsidy of 1.16% of the salary into the EPS. This accumulation is used to pay various pension benefits on retirement or early termination. The kind of pension a member gets under the scheme depends upon the age at which they retire and the number of years of eligible service.

Monthly pension = (pensionable salary x pensionable service)/70.

The pensionable salary will be calculated on the average monthly pay for the contribution period of the last 60 months (as against 12 months earlier) preceding the date of exit from the membership.

The maximum possible replacement rate is roughly 50%.

With effect from September 2014, a minimum pension level of INR 1 000 per month has been provided under the scheme.

Targeted Social Safety Net

There is no population wide social safety net.

Early retirement

The EPS can be claimed from age 50 with ten years of contribution and the benefits are reduced by 3% per year of early retirement. If a member leaves his job before rendering at least ten years of service, he is entitled to a withdrawal benefit. The amount he can withdraw is a proportion of his monthly salary at the date of exit from employment. This proportion depends on the number of years of eligible services he has rendered. No pension is payable in cases where there is a break in service before ten years.

In case of EPF, there are multiple scenarios, which allow for early access to the accumulation. Partial withdrawals relate to marriage, housing advance, financing life insurance policy, illness of members/family members, withdrawals are also permitted one year before retirement etc. In addition to various permitted partial withdrawals, employees can close their account and withdraw the full corpus in case they move from one employer to another or decide to retire early. No gratuity can be claimed before five years of service.

Late retirement

It is not possible to delay claiming pension after the normal pension age.

Taxation of workers

From 2020 onwards, India introduced a new tax regime that lowered tax rates but also removed all tax deductions with no additional allowances for those aged over 60. As not all deductions were applied within the pension model the new regime has been adopted.

Taxation of worker’s income

India’s financial year begins in April. The following rates apply for 2020:

Taxation of pensioners

There is no additional tax relief for pensioners.

Social security contributions payable by pensioners

Pensioners do not pay any social security contributions.

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