Salaried employee? Retire rich! EPFO hikes Employee Provident Fund (EPF) interest rate to 8.65% - Calculate your gains

Ahead of the elections, the NDA government through its Employees’ Provident Fund Organisation (EPFO) has given a gift to salaried employees by hiking interest rate on provident fund. The decision was taken in 224th meeting of the Central Board of Trustees, held on Thursday, under the chairmanship of Union Minister of State for Labour and Employment (I/C) Santosh Kumar Gangwar. In this meeting, EPF interest rates were hiked to 8.65 % from 8.55%. This would be 10 basis point rise in EPF. Notably, 8.65% interest rate is similar to what employees enjoyed in fiscal FY17, however, still lower to 8.8% rate of FY16. But, definitely now your gains on EPF will be more during retirement. Let's find out how! 

Know your Employee Provident Fund (EPF)! 

Currently, an employee is asked to contribute 12% of their basic salary plus dearness allowance in EPF.

On the other hand, an employer contributes only 3.67% towards EPF, while remaining 8.33% is added in your employee pension scheme. 

Contribution is rounded to the nearest rupee for each employee, for the employee share, pension contribution and EDLI contribution. The Employer Share is difference of the EE Share (payable as per statute) and Pension Contribution. Notably, contributions are payable on maximum wage ceiling of Rs 15,000. However, the employee can pay at a higher rate and in such case employer is not under any obligation to pay at such higher rate.

Your employer’s contribution in your EPF is tax-free, however, your contribution is tax-deductible under section 80 of Income Tax Act. This section allows you to claim about Rs 1.5 lakh tax exemption from your gains. However, there are few tax deducted at source (TDS) on the interest your earn on EPF investment. 

If you have withdrawn over Rs 50,000 before completion of 5 years, then TDS is applicable. However, if less than Rs 50,000 is withdrawn before 5 years of completion, then a TDS of 10% is furnished. 

There are no TDS levied on withdrawal after 5 years, or transfer of PF account. 

Let's calculate:

For instance, at the age of 21, your monthly basic salary plus dearness allowance stands at Rs 10,000 - from which you contribute 12%. Meanwhile, your employer contributes 3.67%. You have taken the retirement age of 58 years. Then post retirement, you will take home a massive over Rs 72.76 lakh.

(Image Source: ClearTax Calculator)

Similarly, if your basic salary plus dearness allowance is at Rs 10,000 per month, from which you contribute 12% in EPF, while your employer gives in 3.67%. You have selected the retirement age as 58. Here, you will take home over Rs 48.49 lakh. 

(Image Source: ClearTax Calculator)

Take note, the more early age you start working, the higher will be your EPF gains on retirement.Generally, a youth begins working from the age of 21 in India, after graduation. Hence, this is best opportunity for such young generation to have a good savings for their retirement. Notably, EPF is still better than traditional format of investment like fixed deposits, term deposits, etc. 

The EPFO does allow higher salary class to avail benefits of EPFO. To pay contribution on higher wages, a joint request from Employee and employer is required.