Two people retiring from the same company on the same day can receive very different pensions. The difference usually comes down to which scheme they are covered by, how long they contributed, and in some cases, whether they chose to annuitise a larger share of their corpus.
There is no single pension formula in India. There are at least three distinct systems, each with its own logic and its own calculator. Understanding which one applies is the starting point for estimating retirement income.
how EPS 1995 calculates pension
The Employees’ Pension Scheme is the pension arm for salaried workers covered by the EPF. The employer contributes 8.33% of pay to the pension fund, and the Central Government adds 1.16% up to a wage ceiling .
The formula is fixed: pensionable salary × pensionable service ÷ 70 . Pensionable salary is the average of the last 60 months’ basic pay plus dearness allowance, and for most members it is capped at ₹15,000 a month . Pensionable service is the total years under EPS, rounded per scheme rules.
A simple example: ₹15,000 pensionable salary, 25 years of service. That works out to (15,000 × 25) ÷ 70, or roughly ₹5,357 per month .
Two things limit the payout. The ₹15,000 salary cap applies to most post-2014 members, so a higher actual salary does not translate into a higher pension. And service is capped at 35 years . Full pension starts at 58. Early pension from 50 carries a reduction for each year taken early .
Family benefits exist. A spouse can receive a widow pension, and up to two children can receive a child pension until a specified age .
how NPS calculates pension
The National Pension System works differently. There is no defined formula. The pension depends on what the corpus grows to and how much of it is annuitised .
An NPS calculator needs several inputs: current age and retirement age, monthly contribution, expected rate of return, annuity period, the percentage of corpus allocated to annuity, and the expected annuity rate . The corpus is calculated using compound interest on monthly contributions .
At exit, the rules changed in 2025. For the All Citizen Model, up to 80% can now be withdrawn as lump sum, with at least 20% used to purchase an annuity . Previously, the split was 60% lump sum and 40% annuity.
The annuity rate determines the monthly pension. If ₹20 lakh is annuitised at a 6% rate, the annual pension is ₹1.2 lakh, or ₹10,000 per month. Annuity rates vary by provider, age, and the option chosen. A life annuity without return of purchase price pays the highest monthly amount. A joint life annuity with return of purchase price pays less but continues for a spouse and returns capital to nominees .
For smaller corpora, the rules are different. A corpus up to ₹8 lakh can be withdrawn entirely as lump sum, with no annuity required. Between ₹8 lakh and ₹12 lakh, up to ₹6 lakh can be taken immediately, with the balance through systematic withdrawals over at least six years .
how the Unified Pension Scheme calculates pension
UPS applies to Central Government employees who opted for it. It is a defined-benefit scheme layered on top of NPS .
The assured payout is 50% of the average basic pay drawn over the last 12 months, for a minimum qualifying service of 25 years . For service between 10 and 25 years, the payout is proportionate. The minimum assured pension is ₹10,000 per month after 10 years of service .
Dearness Relief applies to the assured payout, based on the All India Consumer Price Index for Industrial Workers .
A lump sum payment is also allowed: 1/10th of monthly emoluments (basic pay plus DA) for every completed six months of service. This does not reduce the assured pension .
Contributions under UPS are 10% from the employee and 10% from the government, with an additional 8.5% government contribution to a pool corpus that supports the assured payout .
how pension income is taxed
The tax treatment depends on the source of the pension.
Pension received from an ex-employer, whether directly or through an annuity purchased by the employer, is taxed under Income from Salaries. This means the standard deduction applies: ₹50,000 under the old regime, ₹75,000 under the new regime .
Annuity income not purchased by an employer is taxed under Income from Other Sources, and the standard deduction does not apply .
For NPS, up to 60% of the corpus is tax-exempt on withdrawal. The annuity portion is fully taxable as regular income .
what a pension calculator actually shows
An NPS calculator produces two numbers: the corpus accumulated by retirement and the monthly pension that corpus can generate . The first number depends on contributions and returns. The second depends on the annuity rate at retirement, which is unknown today.
For EPS, a calculator is simpler. The formula is fixed, and the inputs are known: pensionable salary and service years. The output is a precise number, capped by the salary ceiling.
For UPS, the assured payout is defined by the scheme rules. The calculator would show 50% of last 12 months’ average basic pay, adjusted for qualifying service.
what retail investors should take from this
The pension landscape is fragmented. A salaried worker covered by EPS gets a modest fixed amount. An NPS subscriber gets a market-linked corpus with a choice of how much to annuitise. A Central Government employee under UPS gets an assured payout.
For anyone estimating retirement income, the first step is identifying which scheme applies. The second is understanding the caps and rules that limit the payout. The third is building parallel savings, because no single scheme is designed to replace working income on its own.
Frequently Asked Questions
1. What is the formula for EPS pension calculation?
Monthly pension = (pensionable salary × pensionable service) ÷ 70. Pensionable salary is the average of the last 60 months’ basic pay plus DA, capped at ₹15,000 for most members. Service is capped at 35 years .
2. How is NPS pension calculated?
There is no fixed formula. The corpus is built through monthly contributions and investment returns. At exit, a portion is used to purchase an annuity, and the annuity rate determines the monthly pension. The calculator needs age, contribution, expected return, and annuity percentage as inputs .
3. What is the minimum annuity percentage required in NPS?
For the All Citizen Model, at least 20% of the corpus must be used to purchase an annuity. Up to 80% can be withdrawn as lump sum. This changed from the earlier 40% annuity requirement .
4. How is pension income taxed in India?
Pension from an ex-employer is taxed under Income from Salaries, and the standard deduction applies. Annuity income not purchased by an employer is taxed under Income from Other Sources, with no standard deduction. For NPS, up to 60% of the corpus is tax-exempt, while annuity income is fully taxable .
5. What is the Unified Pension Scheme payout?
UPS offers an assured payout of 50% of the average basic pay over the last 12 months, after 25 years of service. For 10 to 25 years of service, the payout is proportionate. The minimum assured pension is ₹10,000 per month after 10 years .
