EPF: How to create Rs 1.30 crore tax-free corpus starting with basic salary of Rs 20,000
An employee contributes a minimum of Rs 1,800 and a maximum of 12 per cent of their basic salary to their EPF. Their employer in the equal proportion also contributes to the employee account. From the employers contribution 8.33 per cent goes to the Employee Pension Fund (EPS) and 3.67 per cent goes to EPF.
EPFO: Employees Provident Fund (EPF) is a central government retirement fund scheme that provides the account holder with a lump sum corpus and a monthly pension at maturity. One contributes a minimum of Rs 1,800 and a maximum of 12 per cent of their basic salary to their EPF.
Their employer, in equal proportion, also contributes to the employee account.
From the employer's contribution, 8.33 per cent goes to the Employee Pension Fund (EPS) and 3.67 per cent goes to the EPF.
The employee gets a 8.25 per cent annual compound interest on the overall contributions including that of the employer.
EPF is one of the few investment options that fall into the category of exempt-exempt-exempt (E-E-E).
It means deposits, up to Rs 1.50 lakh a financial year, the interest earned, and the maturity amount are tax-free.
An employee can also contribute more than 12 per cent of their basic salary to their account, but that is called a voluntary provident fund (VPF).
In VPF, an employee's contributions of over 12 per cent of the basic salary are taxed.
On the other hand, the employer doesn't contribute more than 12 per cent even if the employee opts for VPF.
Since the corpus in EPF is tax-free and monthly transfers into the EPF account maintain continuity of investment, a lot of money experts encourage employees to contribute to the maximum limit in EPF.
One advantage is that even if your basic salary is less at the beginning of your career, you can increase your EPF contribution as your salary increases.
You can increase your EPF contribution yearly by five or 10 per cent or as much as your investment capacity allows.
If your basic salary is Rs 20,000, you contribute 12 per cent of it every month, increase your contributions by five per cent every year, and then by the age of 60, you can create a tax-free corpus of Rs 1.29 crore after the total contribution of Rs 33.97 lakh.
On the other hand, if you delay your investment by 10 years and start contributing at 35 years of age, under the same conditions of basic salary and increasing amount, your total tax-free corpus at 60 years of age will be Rs 47.80 lakh while your contribution will be Rs 17.95 lakh.
This is the advantage of starting to invest early. See the chart to know how you can create a Rs 1.30 crore corpus.
Chart COurtesy: Finnovate
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