EPF Calculator: Employees' Provident Fund (EPF) is a prominent retirement scheme that gives you the facility to accumulate a huge corpus and a monthly pension for your post retirement life. Both employee and the employer contribute to the EPF account of the former. A portion of the employer's contribution goes into Employees' Pension Scheme (EPS), which the employee gets in the form of monthly pension. The EPF scheme is run by Employees' Provident Fund Organisation (EPFO), which offers a 8.25 per cent interest rate. As per the EPFO rule, an employee can contribute a maximum of 12 per cent of the basic wages+ dearness allowance+ retaining allowance in their EPF. The employer, meanwhile, also contributes 12 per cent of the pay, out of which 8.33 per cent is diverted to the pension fund and the rest 3.67 per cent goes to EPF.

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EPF is one of the few categories that enjoys the exempt-exempt-exempt (E-E-E) status from the Income Tax Department (I-T Department).

It means deposits, interest earned up to 12 per cent contribution and the maturity amount are tax free.

The scheme also provides tax relaxation of up to Rs 1.50 lakh under Section 80C of the Income Tax Act, 1961.

An employee can also contribute more than 12 per cent.

However, that is is known as Voluntary Provident Fund (VPF).

The basic difference between EPF and VPF is that while there is no tax on interest earned from EPF, interest earned above 12 per cent contribution is taxed under VPF.

Nehal Mota,Co-Founder, Finnovate, says, "In any retirement plan, it is the post-tax returns that matter, and the EPF brings some amazing advantages like matching employer contribution, tax exemption on EPF contribution, tax-free interest, and zero-tax liability on the final redemption of EPF. Apart from the wealth, it creates in absolute terms over long periods of time, the EEE (exempt, exempt, exempt) status of EPF makes it doubly attractive in pre-tax equivalent terms."

In this write-up, through expert calculations, we will tell you how EPF is calculated and how much EPF corpus you can create on the basic salary of Rs 20,000, Rs 30,000 or Rs 50,000, if you are starting EPF contribution at 25 years of age, invest 12 per cent, gets a five per cent salary increment every year, contribute until the age of 60, and gets a 8.25 per cent interest rate on your investments.

Also, in each of the three scenarios, we will tell you how less your retirement fund will be if, instead of 25 years of age, you start investing in EPF at 35. 

What if your basic salary is Rs 20,000?

Details Total Amount Total Amount  
(Starts at age 25) (Starts at age 35)
Basic Salary Rs20,000 Rs20,000
Employee PF Contribution 12% Rs2,400 Rs2,400
Employer PF Share 3.67% # Rs734 Rs734
Total EPF Monthly Contribution Rs3,134 Rs3,134
Contribution Period 35 Years 25 Years
Annual CAGR Yield 8.25% 8.25%
Annual EPF step-up 5% 5%
Your Contribution Rs33.97 lakhs Rs17.95 lakhs
Final Corpus Rs129.89 lakhs Rs47.80 lakhs
Wealth Creation Ratio 3.82X 2.66X

Chart Courtesy: Finnovate

In the above illustration, the 35-year tenure of EPF creates a sizable corpus of Rs 1.30 crore, although the rate of interest is just 8.25 per cent.

However, it must be noted that, apart from the Section 80C exemption, the interest earned is fully tax free up to 12 per cent contribution.

If you factor these into the respective tax brackets, then the post tax equivalent yield should be much higher.

Incidentally, if the EPF contribution had started 10 years late, there is a sharp two-thirds fall in final corpus and even the wealth creation ratio is down sharply.

 

What if your basic salary is Rs 30,000

Details Total Amount Total Amount  
(Starts at age 25) (Starts at age 35)
Basic Salary Rs30,000 Rs30,000
Employee PF Contribution 12% Rs3,600 Rs3,600
Employer PF Share 3.67% # Rs1,101 Rs1,101
Total EPF Monthly Contribution Rs4,701 Rs4,701
Contribution Period 35 Years 25 Years
Annual CAGR Yield 8.25% 8.25%
Annual EPF step-up 5% 5%
Your Contribution Rs50.95 lakhs Rs26.92 lakhs
Final Corpus Rs194.83 lakhs Rs71.70 lakhs
Wealth Creation Ratio 3.82X 2.66X

Chart Courtesy: Finnovate

In the above illustration, the 35-year tenure of EPF creates a sizable corpus of Rs 1.95 crore.

Apart from the Section 80C exemption, the interest earned on EPF is fully tax free up to 12 per cent contribution.

If you factor these into the respective tax brackets (20 per cent or 30 per cent), then the pre-tax equivalent yield should be much higher, says Nehal.

What if your salary is Rs 50,000

Details Total Amount Total Amount  
(Starts at age 25) (Starts at age 35)
Basic Salary Rs50,000 Rs50,000
Employee PF Contribution 12% Rs6,000 Rs6,000
Employer PF Share 3.67% # Rs1,835 Rs1,835
Total EPF Monthly Contribution Rs7,835 Rs7,835
Contribution Period 35 Years 25 Years
Annual CAGR Yield 8.25% 8.25%
Annual EPF step-up 5% 5%
Your Contribution Rs84.92 lakhs Rs44.87 lakhs
Final Corpus Rs324.72 lakhs Rs119.50 lakhs
Wealth Creation Ratio 3.82X 2.66X

Chart Courtesy: Finnovate