Pensions and retirement saving in India
Reviewed by Mellow Editorial Team, HR & payroll content team
Retirement saving in India combines a mandatory provident fund system with optional schemes that employees can join on top. For most salaried workers, the Employee Provident Fund is the foundation — but understanding what sits alongside it helps you make better decisions about long-term financial security.
How the Employee Provident Fund works
EPF is the compulsory retirement savings scheme for most organised-sector employees. Both the employee and the employer each contribute 12% of basic wages plus dearness allowance every month. The employee's full 12% goes into the EPF account. The employer's 12% is split: most of it goes to EPF, and a smaller portion goes to the Employee Pension Scheme (EPS), which funds a monthly pension after retirement.
The EPF account earns interest, declared annually by the EPFO (Employees' Provident Fund Organisation). At retirement — or under specific conditions such as unemployment or certain medical needs — the accumulated corpus can be withdrawn.
One practical point: your EPF account is tied to a Universal Account Number (UAN). When you change jobs, you transfer the balance to your new employer's contribution rather than withdrawing it. Withdrawing early breaks the compounding effect and can trigger a tax liability, so it is generally worth preserving the account.
The Employee Pension Scheme
EPS sits inside the employer's EPF contribution. You do not contribute to it separately. After a qualifying period of service, it pays a monthly pension calculated on years of service and pensionable salary — not the lump sum you might expect. The pension amount is often modest, which is why EPF alone is rarely enough for a comfortable retirement and additional saving matters.
Voluntary Provident Fund
If you want to save more than the mandatory 12% through the EPF route, a Voluntary Provident Fund (VPF) contribution lets you do that. You contribute an additional percentage of your basic wages, which earns the same interest rate as EPF. The employer is not obliged to match VPF contributions. It is a simple, low-friction way to increase retirement savings if you are already enrolled in EPF.
National Pension System
The National Pension System (NPS) is a government-regulated, market-linked retirement savings scheme open to most Indian residents. It works differently from EPF. Contributions are invested across asset classes — equities, corporate bonds, government securities — and the eventual corpus depends on investment returns, not a fixed rate.
NPS has two tiers. Tier I is the retirement account: withdrawals are restricted until the age of 60, and at maturity a portion of the corpus must be used to buy an annuity (a regular income for life). Tier II is a voluntary savings account with no lock-in, but it does not carry the same tax advantages.
For employers, NPS is relevant in two ways. First, some employers offer NPS as part of a salary structure, making an employer contribution to the employee's NPS account. Under current income tax rules, employer contributions up to a certain percentage of basic salary can be deducted as a business expense and are treated favourably for the employee. Second, the Central Government mandates NPS for its own employees; private sector participation is voluntary.
One important caveat: because NPS returns depend on markets, the final corpus is not guaranteed. That is a meaningful difference from EPF, where the interest rate is set annually by the government.
Public Provident Fund
PPF is a fixed-return, government-backed savings scheme available to any Indian resident — employed, self-employed or otherwise. It is not linked to employment, so it is especially relevant for founders, contractors, gig workers and anyone without EPF access.
PPF has a 15-year lock-in with partial withdrawal allowed after the seventh year. Contributions, interest and maturity proceeds all have tax advantages under the old income tax regime. Under the new regime, the treatment differs, so it is worth reviewing with a tax adviser if you are comparing PPF against other instruments.
Gratuity — a separate retirement benefit
Gratuity is not a savings scheme you contribute to, but it is a meaningful retirement benefit. After completing five years of continuous service with an employer, an employee becomes eligible for gratuity — a lump sum paid by the employer on exit or retirement, calculated on the basis of last drawn salary and years of service. Under India's four consolidated Labour Codes that came into force in 2025, the treatment of gratuity is carried forward broadly in line with existing practice.
Gratuity is funded by the employer, not deducted from your salary. If your employer has a gratuity trust or insurance policy, the funds accumulate over your tenure. It is worth knowing your entitlement, particularly if you are approaching the five-year mark or planning a job change.
Putting it together
For a salaried employee, retirement income typically comes from three places: the EPF/EPS corpus and pension, any additional voluntary savings (VPF, NPS, PPF), and gratuity. None of these alone is sufficient for most people. The combination, and how much you contribute beyond the mandatory minimum, determines the financial cushion you have in retirement.
---
Run HR and payroll in India with Mellow
Mellow brings HR, payroll and 12 AI agents into one platform — built to handle India properly, with payroll included, from £4 per employee per month. The AI agents don't just answer questions; they generate contracts, run cost estimates and draft letters for you.
[Start a free trial →](/register)