EPF (Employee Provident Fund Scheme)

What is EPF?
EPF is a retirement benefit scheme introduced in 1952, under which a defined amount is deducted from the salary of the employee for the contribution for the fund. The employer also contributes to the fund. All the contribution by employer and employee is invested in the government securities. The interest earned on those securities is credited to the Provident Fund Account.

The accumulated fund is paid to the employee at the time of retirement or resignation.

In case, of death before the retirement, the accumulated amount is paid to the employee’s legal heirs.

Under section 80C of the Income Tax Act, the employee gets a tax deduction.

Many employees depend upon their fund for their retirement.

But have you ever calculated if your EPF is sufficient for your retirement?
Let’s study more about EPF.

Contribution in EPF– The contribution to EPF account is 12% of your “Basic salary” plus “Dearness Allowance (DA)” and other allowances. Many private employees are not even given any DA or other allowances.

Monthly total salary 60,000 per month
Basic Salary 25,000 per month
EPF contribution(Employer @12% +Employee@12% ) of Basic salary 3000+3000=6,000 per month

Do you think this much contribution is enough for your retirement?

Lesser known facts about EPF:
• Many companies keep the basic salary low to pay lesser contribution to the EPF.
• Also, the expenses charges of EPF is sometimes deducted from employee’s salary.
• If you are an employee who started working before 2014, then the 8.33% of the employer contribution goes to EPS (Employee pension scheme) – this lowers the contribution to the EPF.

 Contribution EPF EPS
By employee 12% of 25000=3000 0
By Employer 12% of 25000 Less 8.33% of 15000 =1750.5 8.33% of 15000 =1248.5
By Central Government 0 1.16% of 15000 =174

• Interest rates are different for every year.
• Interest rates are bond dominating and investors cannot analyze the portfolio.
• Employee must complete at least 5 years in EPF with the same employer to withdraw from EPF- if you change the job before 5 years your EPF amount will be ceased.
• Equity investment is low and very pessimist. Hence a very low return on your investment.
• Interest rate declared by central government includes the administrative charges it levies on the employer. Which means you will not get 8.55% but you will get 8 %.
• Currently the EPF is exempted from any tax at the time of redemption. This exemption may or may not be there in the times to come.
• The withdrawal for expenditures (like house building, repair, child’s marriage) leaves little for the retirement fund, which is the main focus of the EPF.

Being a Financial Planner, I advise not to depend on the EPF for the retirement.
The rate of interest from 2001-2005 was 12%. But in 2009 it was reduced to 9% and it is reducing since then. Current interest rate of EPF as in Financial year 2018-19, is 8.55% (remember you will not get 8.55 %, you will get 8% after deduction of administrative charges).
Now let’s calculate if EPF is sufficient for our retirement.

In year 2018 In year 2048
Monthly Salary 70,000/-
Basic salary 25,000/-
Monthly Expenditure 50,000/- 2,87,000/-(assuming 6% inflation)
Annual expenditure 6,00,000/- 34,44,000/-
EPF contribution(Employer @12% +Employee@12% ) of Basic salary 6000/-
Annual Contribution to EPF 72,000/-

corpus after 30 years

(assuming 7.5% rate of interest)

77,43,000/-

*assuming the current age of employee is 30 years and he wants to retire at the age of 60 and we need the corpus from the age of 60 till 90.
Making similar contribution in Equity Mutual fund can give following returns-

In year 2018 In year 2048
Monthly Salary 70,000/-
Basic salary 25,000/-
Monthly Expenditure 50,000/- 2,87,000/-(assuming 6% inflation
Annual expenditure 6,00,000/- 34,44,000/-
Contribution to Equity Mutual Fund 6000/-
Annual Contribution to EPF 72,000/-

Corpus after 30 years

(assuming 13% rate of interest)

2,25,69,113/-

 

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