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NISM-Series-X-B: Investment Adviser (Level 2) · Retirement Products

Employees' Pension Scheme and Gratuity: Eligibility and Calculation

Updated 11 October 2026 · Fact-checked

The Employees' Pension Scheme (EPS-95) pays a monthly pension of pensionable salary × pensionable service ÷ 70, usually from age 58 after 10 years of service. Gratuity is a lump sum for 5+ years of service, calculated as last drawn wages × 15 × years ÷ 26 under the Payment of Gratuity Act, with a tax-exempt ceiling of ₹20,00,000.

Understand Employees' Pension Scheme and Gratuity

Two employer-linked benefits sit under retirement income: a monthly pension from the Employees' Pension Scheme, 1995 (EPS-95) and a lump sum called gratuity. Both reward length of service. Neither depends on market returns.

EPS is run within the EPF framework. Your employer's contribution to the provident fund is split. 8.33% of wages goes to EPS and the rest goes to your EPF account. You do not contribute to EPS separately. The wage taken for EPS is capped at ₹15,000 a month, so the monthly EPS contribution is at most ₹1,250. The Central Government also adds a share to EPS.

EPS pays a pension, not a return of your money. It is a defined benefit: the amount comes from a formula based on salary and service. You usually get superannuation pension at age 58 if you have completed at least 10 years of eligible service. Early pension is possible from age 50, with a reduction of 4% for each year you start before 58. A minimum pension of ₹1,000 a month applies. If service is under 10 years, you can take a withdrawal benefit instead of a pension.

Gratuity is a thank-you payment from the employer under the Payment of Gratuity Act, 1972. It applies to establishments with 10 or more employees. You become eligible after 5 years of continuous service, on retirement, superannuation, resignation, death or disablement. The 5-year condition is waived on death or disablement. The employer pays it; you do not contribute.

Tax treatment differs by employee type. Government employees get gratuity fully exempt. For private employees covered by the Act, the exempt amount is the least of three figures: the gratuity actually received, the statutory ceiling of ₹20,00,000, and the formula amount. Any excess is taxable as salary.

Key formulas to remember

EPS monthly pension
Monthly pension = (Pensionable salary × Pensionable service) ÷ 70
Pensionable salary is the average monthly wage over the last 60 months before leaving membership, capped at ₹15,000. Service is in years.
EPS contribution
Employer to EPS = 8.33% of wages (wages capped at ₹15,000, so maximum ₹1,250 a month)
Employee pays 12% to EPF only. The employer's 12% is split between EPS and EPF.
EPS eligibility
Pension at age 58 with at least 10 years of service
Early pension from age 50 with a 4% reduction for each year before 58. Minimum pension ₹1,000 a month.
Gratuity under the Act
Gratuity = Last drawn (Basic + DA) × 15 × Years of service ÷ 26
Part of a year over 6 months counts as a full year. Divisor 26 is working days in a month.
Gratuity eligibility
5 years of continuous service (waived on death or disablement)
Applies to establishments with 10 or more employees.
Gratuity tax exemption (private employee covered by the Act)
Exempt = Least of (Gratuity received, ₹20,00,000, Formula amount)
Government employees: fully exempt. Excess over the exempt amount is taxed as salary.

How to solve Employees' Pension Scheme and Gratuity questions

Identify first whether the question is about EPS pension or gratuity, then apply the matching formula and check the condition.

  1. 1Read the question and mark the benefit asked: EPS pension, gratuity amount, or gratuity tax.
  2. 2Check eligibility first: 10 years of service and age 58 for EPS pension; 5 years of service for gratuity (unless death or disablement).
  3. 3For EPS, cap pensionable salary at ₹15,000. Use the average of the last 60 months, not the last month alone.
  4. 4For EPS, compute salary × service ÷ 70 and keep service in years. Apply the 4% per year reduction if pension starts before 58.
  5. 5For gratuity, take only Basic + DA. Round service up if the extra months exceed 6. Then apply × 15 ÷ 26.
  6. 6For tax, find the three numbers: amount received, ₹20,00,000 and the formula amount. Exempt is the lowest. Taxable is received minus exempt.
  7. 7Match your answer to the options and watch for trap values such as ÷ 30 or ÷ 12.

Quickest way: Divisor shortcut: 70 for EPS, 26 for gratuity

When to use it: Use when a numeric MCQ gives salary and service and you must pick the right figure fast, especially with negative marking.

  1. Say it out loud: EPS is divided by 70, gratuity by 26.
  2. EPS: multiply capped salary by years, then divide by 70. A quick check is that 35 years at ₹15,000 gives ₹7,500.
  3. Gratuity: 15 ÷ 26 is about 0.577 of a month's wages per year of service.
  4. Round the years first, then calculate.
  5. For tax, compare the three numbers and pick the smallest as exempt.

Common mistakes in Employees' Pension Scheme and Gratuity

  • Using actual salary above ₹15,000 in the EPS formula.

    Students forget that pensionable salary is capped.

    Fix: Always replace salary with the lower of actual average salary and ₹15,000 before applying ÷ 70.

  • Dividing by 30 instead of 26 for gratuity covered by the Act.

    A month feels like 30 days, and 26 is the working-day count.

    Fix: Use ÷ 26 for employees covered by the Act. State clearly that 26 is the working days in a month.

  • Including allowances such as HRA or bonus in gratuity wages.

    Students think wages means total pay.

    Fix: Use only Basic plus Dearness Allowance.

  • Not rounding service up when months exceed 6.

    Students use fractions such as 12.67 years.

    Fix: Over 6 months counts as a full year, so 12 years 8 months becomes 13. Exactly 6 months or less is dropped.

  • Saying EPS needs an employee contribution of 8.33%.

    Mixing up who pays into EPF and EPS.

    Fix: The employer's share is split: 8.33% to EPS. The employee's 12% goes entirely to EPF.

  • Treating the whole gratuity as exempt for every employee.

    Students remember the exemption but forget the three-way test.

    Fix: Government employees are fully exempt. Private employees get the least of received amount, ₹20,00,000 and the formula amount.

Worked examples

Example 1

An employee retires at 58 after 30 years of eligible service under EPS-95. His average monthly salary for the last 60 months was ₹22,000. What is the monthly EPS pension (to the nearest rupee)?

Show the solution
  1. Eligibility: age 58 and more than 10 years of service, so pension is payable.
  2. Pensionable salary is capped at ₹15,000, so use ₹15,000 instead of ₹22,000.
  3. Pension = (15,000 × 30) ÷ 70.
  4. 15,000 × 30 = 4,50,000.
  5. 4,50,000 ÷ 70 = 6,428.57, which rounds to ₹6,429.

Answer: About ₹6,429 a month.

Example 2

A private-sector employee covered by the Payment of Gratuity Act leaves after 12 years 8 months of continuous service. His last drawn Basic + DA is ₹60,000 a month. The employer pays ₹5,00,000 as gratuity. Find the exempt and taxable gratuity.

Show the solution
  1. Service of 12 years 8 months: 8 months is more than 6, so round up to 13 years.
  2. Formula amount = 60,000 × 15 × 13 ÷ 26.
  3. 60,000 × 15 = 9,00,000. Then 9,00,000 × 13 ÷ 26 = 9,00,000 × 0.5 = ₹4,50,000.
  4. Three figures: received ₹5,00,000, ceiling ₹20,00,000, formula ₹4,50,000.
  5. Exempt amount is the least, ₹4,50,000.
  6. Taxable = 5,00,000 − 4,50,000 = ₹50,000.

Answer: Exempt ₹4,50,000; taxable ₹50,000, taxed as salary.

Exam tips

  • Expect direct recall questions on 8.33%, ₹15,000 cap, age 58, 10 years and divisor 70.
  • In numeric MCQs, first check for a trap: salary above ₹15,000 (EPS) or non-basic allowances (gratuity).
  • Remember the gratuity exemption is a least-of-three test for private employees and full exemption for government employees.
  • Know that EPS is a defined benefit funded from the employer's share, while gratuity is paid only by the employer.
  • With 25% negative marking in NISM-Series-X-B, skip a calculation only if you cannot rule out two options; otherwise compute carefully.

Practice questions from Retirement Products

Employees' Pension Scheme and Gratuity in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Employees' Pension Scheme and Gratuity: frequently asked questions

Who is eligible for the Employees' Pension Scheme 1995?

EPS covers members of the Employees' Provident Fund, with wages counted up to ₹15,000 a month. You need 10 years of eligible service and age 58 for a regular pension. Early pension is allowed from age 50 with a 4% cut for each year before 58.

What is the EPS pension formula?

Monthly pension = pensionable salary × pensionable service ÷ 70. Pensionable salary is the average monthly wage of the last 60 months, capped at ₹15,000. Service is counted in years.

How is gratuity calculated?

For employees covered by the Payment of Gratuity Act, gratuity = last drawn Basic + DA × 15 × years of service ÷ 26. Part of a year over 6 months counts as a full year. You need 5 years of continuous service, except on death or disablement.

Is gratuity taxable?

Government employees receive it fully exempt. For private employees covered by the Act, the exempt part is the least of the gratuity received, ₹20,00,000 and the formula amount. The excess is taxable as salary.