Employees' Provident Fund (EPF) is a popular retirement scheme where the employee and the employer contribute to the employee's PF account. While the employee can contribute a maximum of 12 per cent to their EPF account, the employer also has to contribute an equal amount to it. The minimum EPF contribution for an employee is Rs 1,800. The benefit of contributing to an EPF is that it falls under the Exempt-exempt-exempt (E-E-E) category, where deposits made up to Rs 1.50 lakh in a financial year, the interest earned, and the maturity amount are tax-free.

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The lock-in period in the EPF scheme is 60 years, and one can withdraw funds under certain conditions.

EPF provides an 8.25 per cent interest rate compounded yearly.

The employer's contribution of 12 per cent is distributed in two parts.

While 3.67 per cent goes to the employee's EPF account, 8.33% goes to the Employee Pension Scheme (EPS), which the employee gets back in the form of a monthly pension post-retirement.  

But what if two investors - A and B- both 25 years of age with a basic salary of Rs 25,000 each, contribute to their EPF in different ways? 

Here, A contributes 12 per cent of their basic salary every month and increases their contribution by five per cent till the retirement age of 60.  

On the other hand, B takes the route of EPF contribution and the systematic investment plan (SIP) in a mutual fund.

B strategises to invest 12 per cent of their basic salary every month in two schemes- Rs 1,800 in EPF till the retirement age of 60 and the rest of the amount in SIP, where they expect an average 12 per cent annual return (XIRR).

B will also increase their SIP amount by five per cent every year.

Given the two situations, who between A and B can build a large corpus? Know the difference through expert calculations.

Calculation for A's Retirement Corpus 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chart Courtesy: Nehal Mota, co-founder, Finnovate  

Basic salary: 3,60,000 a year. 
Initial investment: Rs 30,000 per year (12% of the basic salary)
Annual Contribution Increase: 5%

Key takeaways

Based on the table and assuming an 8.25% interest rate, A can accumulate a significant sum of Rs 3,40,61,077 in their EPF by retirement at the age of 60. 

Breakdown of key takeaways

Total contribution: A would contribute a total of Rs 41,40,129 throughout their service years.
Employer contribution: It's important to note that your employer would also contribute an equal amount, significantly boosting the final corpus. 
So, your final EPF contribution will be-  Rs 3,40,61,077 (employee's)+Rs 3,40,61,077 (employer's contribution) = Rs 6,81,22,154 

Calculation for B's Retirement Corpus 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chart Courtesy: Nehal Mota, Co-founder, Finnovate 

Invested Rs 20,70,065
FV Rs 4,69,41,053
Gains Rs 4,48,70,989
TAX Rs 44,77,099
Corpus Rs 4,24,63,954

By contributing towards their retirement corpus through SIP and EPF, B can accumulate a sizable amount of Rs. 5,16,23,868 by the time of retirement at 60.

This calculation excludes Long Term Capital Gains (LTCG) tax on SIP investments.

The amount, however, includes the employer's contribution.

Breakdown of contributions

EPF: Rs. 7,77,600 (assuming a constant contribution of Rs 1,800 per month till retirement from the employee and the employer each)

SIP: Rs. 20,70,065 (assuming a 12 per cent annual return and a 5 per cent annual increment in SIP amount)

Thus, we see that, given two situations, a full 12 percent contribution to the EPF helped A a higher retirement corpus than B, who opted for the minimum EPF contribution and SIP. 

Here, one factor that you need to keep in mind is that SIP returns can be less or more than 12 per cent annually and calculations will change based on that.

We have calculated on the basis of a 12 per cent return.