Employees Provident Fund
Employees’ Provident Fund (EPF) is one of the most trusted retirement savings plans for employed people. If an employee’s basic salary is ₹25,000 per month and he contributes to EPF for 30 consecutive years, his PF corpus can exceed ₹1 crore by the time of retirement. Based on the current 8.25% annual interest rate, it is estimated that after 30 years, around ₹ 1.12 crore can be deposited in the employee’s account. The biggest reason behind this huge amount is the effect of compound interest, which increases the investment rapidly over time.
How is EPF money deposited?
Under EPF rules, an employee deposits 12% of his basic salary and dearness allowance (DA) in the EPF account every month. The employer also contributes 12%. However, the entire amount of employer’s contribution does not go to EPF. A part of it is deposited in the Employee Pension Scheme (EPS), while the remaining amount is deposited in the EPF account. This amount keeps increasing every year with the interest received.
How will a fund of ₹1.12 crore be created in 30 years?
If the basic salary of an employee is considered to be ₹ 25,000 all the time and he continues to contribute to EPF without any interruption for 30 years, then the total contribution of the employee and the employer will be around ₹ 33.26 lakh. At the same time, the interest received during this period can reach approximately ₹ 78.49 lakh. That means, overall, at the time of retirement, the employee can have a PF corpus of around ₹ 1.12 crore. This shows that in the long run the interest income can be much more than the original investment.
Compound interest makes a big difference
The biggest strength of EPF is its compound interest. In the initial years, the amount deposited in the account increases slowly, but as the balance increases, the interest received on it also starts increasing rapidly. This is the reason why employees who invest for a long time get a larger corpus at the time of retirement. If the employee does not withdraw PF periodically and continues to contribute, the final amount may be much higher.
On what factors will the actual PF corpus depend?
However, this estimate of ₹1.12 crore is based on certain assumptions. The actual PF corpus will depend on the employee’s salary increase, interest rate announced by EPFO every year, tenure of job and regular contributions. If the basic salary increases over time or the employee makes additional investments through Voluntary Provident Fund (VPF), the amount received at the time of retirement can be much higher. In such a situation, EPF proves to be not only mandatory savings but also an effective and safe medium for strong retirement planning.
