Building a hefty sum for retirement for the salaried class with the EPF is an efficient way. The fund is managed by the Employees’ Provident Fund Organisation (EPFO) to ensure finances are adequate through continuous contributions and compounding interest. For a person drawing a basic pay of ₹30,000, following a disciplined route of EPF contributions could very well mean a corpus of ₹2 crores at retirement. This article shows how, along with detailed calculations done in accordance with current EPFO rules.
Understanding EPF-Based Contributions
EPF requires both the employee and employer to contribute 12% of the basic wages plus dearness allowance. In the case of a basic salary of ₹30,000, the employee pays ₹3,600 monthly. The employer contributes an equal amount of ₹3,600, where ₹1,100 is paid towards Employees’ Pension Scheme (8.33%) and the remaining amount of ₹2,500 towards EPF (3.67%). Combined, this gives us a monthly contribution of ₹3,600 + ₹2,500 = ₹6,100. This amount finds itself under an interest rate of 8.25% per annum, compounded monthly-goes a long way in boosting the investment.
Compounding Over 35 Years
If one were 25 years old and planning to retire at 60, 35 years is ample time for the EPF to harness the power of compounding. Assuming a monthly contribution of ₹6,100 with an annual increment in salary of 5% and an interest rate of 8.25%, the total contribution in the 35 years would work out to roughly ₹54,06,168. The half-century gain through interest amounts to ₹1,63,18,569, which gets added due to compounding, thus bringing the total retirement fund to ₹2,17,24,737 by retirement. The rests of the calculation assume that there were no early withdrawals.
Factors Influencing Wealth Creation
Several factors accentuate this potential for wealth enhancement:
- Regular contributions: Both the employer and employee are expected to make contributions, encouraging a disciplined investment habit.
- Compound interest: An interest rate of 8.25% compounded monthly greatly enhances the fund corpus over decades.
- Salary increment: A modest 5% annual increment on salary increases contributions and results in a higher accumulation.
- Tax benefits: Investments in EPF qualify for deductions under Section 80C, thus augmenting savings.
Maximizing the EPF Benefit
No partial withdrawals must be undertaken since when someone makes a withdrawal, that much is reduced from the compounding base, thereby affecting his target of ₹2 crores. Regularly check your EPF balance on the EPFO portal or give a missed call on 011-22901406. A financial advisor must be consulted for planning, to align the EPF with other investments.
Also Read: EPS-95 Pension Scheme Update: RS 2,420 Monthly Pension Plus 17% DA Approved