EPFO

EPF: How to create Rs 1.30 crore tax-free corpus starting with basic salary of Rs 20,000

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.

Read More: EPF Auto Withdrawal: Qualifying limit HIKED – What it means for subscribers | How to make claim submission online

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.

Read More: EPFO Update: How To Check PF Balance In 4 Easy Ways, Details Here

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.

Read More: EPFO Rules for Account Holders: EPFO can give benefit of up to Rs 50,000 on your EPF account | Know how

This is the advantage of starting to invest early. See the chart to know how you can create a Rs 1.30 crore corpus.  

DetailsTotal Amount (Starts at age 25)Total Amount (Starts at age 35)
Basic SalaryRs20,000Rs20,000
Employee PF Contribution 12%Rs2,400Rs2,400
Employer PF Share 3.67% #Rs734Rs734
Total EPF Monthly ContributionRs3,134Rs3,134
Contribution Period35 Years25 Years
Annual CAGR Yield8.25%8.25%
Annual EPF step-up5%5%
Your ContributionRs33.97 lakhsRs17.95 lakhs
Final CorpusRs129.89 lakhsRs47.80 lakhs
Wealth Creation Ratio3.82X2.66X

Chart COurtesy: Finnovate

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