Legislated in 1952, the Employees’ Provident Fund (EPF) is the first social security scheme for workers in Independent India. It was designed for providing financial security for workers after retirement. It also provides death benefits to survivors of the family of the worker concerned if he/she dies before superannuation. Notably, the Employees’ Provident Fund Organisation (EPFO) manages the provident fund and its corpus.
12% of basic
According to the rules, both the employee and the company employing the person contribute to the EPF account. This contribution is 12% of the basic salary plus dearness allowance from the employee’s salary and an equal amount from the employer every month.
The rate of interest applicable to the corpus that accumulates in one’s account is determined every year by the Union labour ministry. This is an annual rate. While the government fixed the interest rate at 8.15% annually for FY23, the rate applicable for FY24 was determined at 8.25%.
EPF helps an employee to create a substantial amount of money which he gets at the time of retirement to help him meet his post-retirement needs. However, one can withdraw money from one’s PF account even before retirement in times of exigencies such as building a house or meeting medical expenditure or marrying off a child, though financial advisors always maintain withdrawing from the PF should be the last measure for any individual.
Provident fund sum on retirement
Since PF is of such great significance in an employee’s life, it is important that he/she has an idea of the corpus that can be made during an average working life.
Let’s try and calculate the corpus that an individual will create if the basic and DA add up to Rs 15,000. For the purpose of calculation, let’s assume that the individual is 25 years of age and would retire at 60. Let’s also assume that the annual rate of interest is 8.15%.
The total amount one will be entitled to at 60 years is Rs 83.25 lakh. Of this amount, Rs 15.12 lakh is the nominal contribution of the employee while the interest component works out to Rs 68.13 lakh.
Needless to say, if any of the variables such as initial age, the (basic + DA) factor or retirement age is tweaked the amount changes.
For example, if the rate of interest is taken as 8.1% and the basic as Rs 12,000, the amount works out to Rs 81.52 lakh.
It is important to note that while the full 12% of the employee’s contribution goes directly into the PF corpus, the employer’s contribution gets split into two parts – 3.67% is deposited into the PF corpus while 8.33% goes into a pension account.
This pension account is also managed by the EPFO and after retirement, the employee gets a monthly pension from this corpus.
Employees’ Provident Fund is the first social security scheme in Independent India and still remains one of the most significant. Here is a calculation to understand what kind of corpus PF can build for an employee on retirement. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
