Provident Fund, Gratuity and National Pension Scheme (ICSE Class 10 Commercial Studies)
Updated 17 October 2026 · Fact-checked
Social security is the protection society gives its members against loss of earnings caused by sickness, injury, unemployment, old age or death of the earner. Provident Fund is a savings scheme with contributions by employee and employer; gratuity is a lump sum paid by the employer for long service; the National Pension Scheme is a contributory retirement scheme that provides a pension. The Acts themselves are not required.
Notice who pays into each scheme: PF and NPS are contributory, gratuity comes from the employer alone, and PF and gratuity pay lump sums while NPS gives a pensi
Illustration drawn for QuestionBuddy.
Understand Provident Fund, Gratuity and the National Pension Scheme
1. Concept of social security
Protection provided by society, through public measures and schemes, against economic and social distress caused by the stoppage or reduction of earnings due to sickness, maternity, employment injury, unemployment, invalidity, old age or the death of the earning member.
Two forms:
- Social insurance: contributory schemes in which workers and employers (sometimes the government) pay regular contributions and benefits are paid when the risk occurs, such as the Provident Fund.
- Social assistance: non-contributory help from the government to the needy, such as old-age pensions to the poor.
Importance: security and morale for workers, higher productivity, less labour turnover, protection of families, and the mark of a welfare state.
2. Provident Fund (PF)
A compulsory savings scheme for employees. A fixed percentage of the employee's basic wages (with dearness allowance) is deducted every month, and the employer contributes an equal percentage; the usual rate in the chapter is 12 per cent each (10 per cent in some establishments). The deposits earn interest each year.
Features: both contribute; a lump sum is paid on retirement or leaving service, or to the nominee on death; partial withdrawals are allowed for housing, education, marriage or illness; it encourages saving. In India most organised-sector workers are covered by the Employees' Provident Fund Organisation (EPFO).
3. Gratuity
A lump-sum payment by the employer to an employee in recognition of long service, when the employee retires, resigns or leaves after a minimum period, usually five years of continuous service. It is also paid to the nominee on death, or to the employee on disablement, even before five years.
Features: paid by the employer alone; no contribution by the employee; the amount depends on the last drawn wages and the completed years of service; it rewards loyalty.
4. National Pension Scheme (NPS)
A voluntary, contribution-based retirement savings scheme of the Government of India regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It is compulsory for most government employees who joined after 2004 and open to other Indian citizens within age limits.
Features: regular contributions to an individual account with a permanent retirement account number; Tier I (main, restricted withdrawal) and Tier II (optional, flexible); money invested by professional fund managers in equity, bonds and government securities; at retirement (60 years) part may be taken as a lump sum and a prescribed minimum share used to buy an annuity for a monthly pension. The exact shares are set by regulation and revised, so learn the idea, not a percentage. It is portable across jobs.
5. Comparison
| Basis | Provident Fund | Gratuity | NPS |
|---|---|---|---|
| Who contributes | Employee and employer | Employer only | Mainly the member (employer may add) |
| Payment | Lump sum with interest | Lump sum by service | Partly lump sum, partly monthly pension |
| Condition | Retirement or leaving | Usually five years' service | At 60, limited early exit |
| Purpose | Compulsory saving | Reward for long service | Regular income in old age |
6. Writing
The syllabus asks for a brief reference. Define each scheme in two or three lines and state who pays. Do not name the Acts.
Provident Fund, Gratuity and the National Pension Scheme: key facts
- Provident Fund
- Employee contributes
- Employer contributes equally
- Lump sum with interest
- Compulsory saving.
- Gratuity
- Employer pays
- After about five years
- Based on last wages and years of service
- Reward for long service.
- NPS
- Member contributes
- Invested by fund managers
- Lump sum plus pension
- Retirement income.
How to answer Provident Fund, Gratuity and the National Pension Scheme questions
Expect the concept, a brief account of each scheme, identification from a case and a comparison.
- 1Check who pays: both (PF), employer only (gratuity), mainly the member (NPS).
- 2Check what is received: lump sum with interest, lump sum for service, or lump sum plus pension.
- 3For a calculation of PF, compute the monthly deduction, double it for the employer match and multiply by months.
- 4State assumptions (for example, ignoring interest) clearly.
Provident Fund, Gratuity and the National Pension Scheme in real life
The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.
Provident Fund contribution
Suppose an employee has a basic wage with dearness allowance of ₹20,000 a month, and both she and her employer contribute 12 per cent.
How much goes into her PF account each month and in a year, ignoring interest?
Try it first, then show the solutionSolution
- Employee: 12% of 20,000 = ₹2,400.
- Employer: ₹2,400. Total per month = ₹4,800.
- Per year = 4,800 x 12 = ₹57,600.
Answer: ₹4,800 a month and ₹57,600 a year (assuming the whole employer share goes to the account and ignoring interest).
Memory hook: Pair pays.
Gratuity
Imagine an employee who retires after 30 years in one company and receives a lump sum from the company, to which he never contributed.
Which scheme is this and who bears its cost?
Try it first, then show the solutionSolution
- A lump sum for long service paid by the employer is gratuity.
- The employee makes no contribution.
Answer: Gratuity; the employer bears the cost.
Memory hook: A gift of thanks from the employer.
Tricks to remember Provident Fund, Gratuity and the National Pension Scheme
Short memory aids. Say each one aloud once, then use it on a question the same day.
PF, G, NPS
PF: Pair pays. Gratuity: Gift from the employer. NPS: Nest you build yourself.
Use it when: Who pays.
Risks covered
Old age, sickness, injury, unemployment, death of the earner.
Use it when: Social security.
Provident Fund, Gratuity and the National Pension Scheme: solved examples
Ordered from board level to HOTS. Try each one before you open the solution.
Example 1: Identify · 1 mark · MCQBoard level
The scheme in which the employer alone pays a lump sum for long service is:
(a) Provident Fund
(b) gratuity
(c) National Pension Scheme
(d) social assistance
Try it first, then show the solutionSolution
- Employer-paid lump sum for service is gratuity.
Answer: (b)
Example 2: Meaning · 2 marks · Very short answerBoard level
What is meant by social security? Name two risks it covers.
Try it first, then show the solutionSolution
- Protection given by society against loss of earnings from contingencies.
- Risks: sickness and old age (also unemployment, injury, death of the earner).
Answer: Society's protection against loss of earnings; covering sickness and old age.
Example 3: PF calculation · 4 marks · Short answerHarder board level
Suppose an employee's monthly basic wage with dearness allowance is ₹25,000 and both employee and employer contribute 12 per cent. Find the monthly contribution of each, the total in a month and in a year, ignoring interest and assuming the whole employer share is credited to the account.
Try it first, then show the solutionSolution
- Employee: 12% of 25,000 = ₹3,000.
- Employer: ₹3,000.
- Total per month = 3,000 + 3,000 = ₹6,000.
- Per year = 6,000 x 12 = ₹72,000.
Answer: ₹3,000 each; ₹6,000 a month; ₹72,000 a year.
Example 4: Comparison · 4 marks · Short answerHarder board level
Distinguish between the Provident Fund and gratuity on four bases.
Try it first, then show the solutionSolution
- Contribution: PF is paid by employee and employer; gratuity by the employer alone.
- Condition: PF is payable on retirement or leaving, with partial withdrawals in service; gratuity usually needs five years of continuous service.
- Purpose: PF encourages compulsory saving; gratuity rewards long service.
- Amount: PF depends on contributions and interest; gratuity depends on last wages and years of service.
Answer: PF is contributory saving; gratuity is an employer's reward for service.
Example 5: Planning for retirement · 8 marks · Case-basedHOTS / competency
Suppose a 28-year-old private-sector employee will work for 32 years. She is covered by the Provident Fund and gratuity, and is deciding whether to join the NPS also. (a) Explain how each scheme will help her at retirement. (b) Give one reason for and one reason against joining the NPS. (c) Why can a social security system improve the economy?
Try it first, then show the solutionSolution
- (a) PF gives her a lump sum with interest from her and her employer's contributions. Gratuity gives a lump sum for her long service. NPS would add retirement savings that can partly provide a monthly pension through an annuity.
- (b) For: it gives a regular pension in old age and is portable between jobs. Against: it is voluntary for her and requires extra regular contributions, and withdrawals before 60 are limited.
- (c) Security raises workers' morale and productivity and reduces labour turnover; it also protects families from poverty and reduces dependence on the government.
Answer: (a) PF and gratuity give lump sums, NPS adds a pension; (b) pension and portability versus extra contribution and limited exit; (c) it raises productivity and protects families.
Where students lose marks in Provident Fund, Gratuity and the National Pension Scheme
The slips examiners see most often, and what to write instead.
Mistake: Saying the employee pays gratuity
Confusion with PF.
Wrong working
Gratuity is paid by both employer and employee.
Right working
Gratuity is paid by the employer alone.
Do this: Gratuity: gift from the employer.
Usually costs: 1-2 marks.
Mistake: Naming the Acts
The syllabus says Acts are not required.
Wrong working
The Employees' Provident Funds Act and the Payment of Gratuity Act...
Right working
Define the schemes only.
Do this: Skip the Acts.
Usually costs: Time, 0-1 mark.
Mistake: Quoting NPS percentages
The shares are revised by regulation.
Wrong working
NPS: 60 per cent lump sum and 40 per cent annuity.
Right working
A part may be taken as a lump sum and a prescribed minimum share must buy an annuity.
Do this: Learn the idea.
Usually costs: 1 mark.
Mistake: Forgetting the employer share in PF sums
Only the employee share is added.
Wrong working
Credit = ₹3,000 a month.
Right working
Credit = employee ₹3,000 + employer ₹3,000 = ₹6,000.
Do this: Double the employee share.
Usually costs: 2 marks.
Exam tips
- The syllabus calls for a brief reference: two or three clear lines for each scheme.
- For a comparison, include who contributes and what is received.
- State assumptions in PF calculations (equal contribution, no interest).
- Use the word "lump sum" for PF and gratuity and "pension" for NPS.
Practice questions on Provident Fund, Gratuity and the National Pension Scheme
Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.
Q1 · 2 marks · Very short answerBoard level
State two features of the Provident Fund.
Hint
Who pays; how paid.
Answer
Both the employee and the employer contribute a fixed percentage of wages, and a lump sum with interest is paid on retirement or leaving service.
Q2 · 4 marks · Short answerHarder board level
Suppose a clerk with a basic wage plus dearness allowance of ₹18,000 contributes 12 per cent to the PF and the employer matches it. Find the amount credited to the account in six months, ignoring interest.
Hint
Double the employee amount.
Answer
Employee per month = 12% of 18,000 = ₹2,160. Employer = ₹2,160. Total per month = ₹4,320. For six months = 4,320 x 6 = ₹25,920.
Q3 · 4 marks · Short answerHarder board level
Describe how a member of the National Pension Scheme builds a retirement income, mentioning the accounts and the role of the regulator.
Hint
Account, tiers, investment, annuity.
Answer
It is a voluntary, contribution-based retirement scheme regulated by PFRDA. The member has an individual account with a permanent retirement account number, with a main Tier I account and an optional Tier II account. The money is invested by professional fund managers. At 60 part is paid as a lump sum and a prescribed minimum share is used to buy an annuity for a monthly pension.
Q4 · 4 marks · Short answerHarder board level
How does a scheme financed by workers and employers differ from help given free by the government to the poor? Name each and give an example.
Hint
Contributory versus free.
Answer
Social insurance is contributory: workers and employers pay regular contributions and receive benefits when the risk occurs, as in the Provident Fund. Social assistance is non-contributory: the government gives help from its own funds to the needy, as with old-age pensions for the poor. In insurance the right to benefit depends on contributions; in assistance it depends on need.
Q5 · 4 marks · Case-basedHOTS / competency
Suppose a young worker says, "Gratuity and PF are the same because both give a lump sum at the end of a job." Evaluate the statement.
Hint
Who pays; why.
Answer
The statement is only partly true. Both give a lump sum, but PF is built from contributions of both the employee and employer and earns interest, while gratuity is paid only by the employer as a reward for long service, usually after five years, and depends on last wages and years served. PF encourages saving; gratuity rewards loyalty.
Test your recall
Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.
1.Who pays gratuity?Show answer
The employer.
2.Which body regulates NPS?Show answer
PFRDA.
3.What does NPS provide at retirement?Show answer
A lump sum and a monthly pension through an annuity.
4.How many years of service are usually needed for gratuity?Show answer
Five years of continuous service.
5.Is the Provident Fund a form of social insurance?Show answer
Yes, it is contributory.
Provident Fund, Gratuity and the National Pension Scheme: frequently asked questions
Can money be withdrawn from the PF before retirement?
Partial withdrawals or advances are allowed for purposes such as housing, education, marriage or illness.
Is NPS only for government employees?
It is compulsory for most government employees who joined after 2004 and open to other citizens within age limits.
Is gratuity paid if an employee dies?
Yes, it is paid to the nominee.