EPF: A retirement hack
you shouldn’t neglect
Rohit | February 28, 2019
epf_savings_zeta

Ensuring you have enough savings for a secure retirement requires good financial planning and awareness. To ease a part of this burden, the government initiated the Employee Provident Fund (EPF) Act in 1952. This retirement scheme enables salaried individuals by saving a portion of their salary every month and giving them a corpus of savings for retirement and other emergencies.

In addition, deposits made to a EPF account earn interest month on month, the rates for which are decided by the Central Board of Trustees (CBT) and the Employee Provident Fund Organisation (EPFO) before the start of a new financial year.

The EPFO recently announced an increment in interest rate on EPF deposits to 8.65% for the financial year 2018-19. This is a 10 basis point increase on the previous interest rate of 8.55% for 17-18 (one basis point is one-hundredth of a percentage point).

How does rise in interest rate affect your PF savings? Before we dig deeper into the numbers, let’s take a quick overview of the EPF scheme and understand how it works.

How is money added to your EPF account?

Employee contribution to EPF - 12% of basic salary (plus Dearness Allowance, if any)

Employer contribution to EPF - 3.67% of basic salary (plus Dearness Allowance, if any)

Employer contribution to EPS (Employee Pension Scheme) - 8.33% of basic salary (plus Dearness Allowance, if any)

The Funds generated in the EPF scheme from millions of enrolled employees are pooled together and invested by the EPFO in government bonds, corporate bonds, equities, and short term debt. In return, these funds generate interest and adds to the employee’s EPF corpus.

Note: The interest rate varies year-on-year and is fixed by CBT in consultation with the finance ministry.

When can I withdraw money from my PF account?

Withdrawals are usually not allowed from a PF account unless you’ve been unemployed for at least 2 months at the time you apply for a withdrawal.

Our suggestion: Make no withdrawals from your PF account unless absolutely necessary. These are risk-free gains that can help you live a stress-free retired life.

Advantages and Benefits of EPF

The Employee Provident Fund helps salaried individuals accumulate a corpus of savings for a secure retirement. But, this is not the only advantage of this scheme. The EPF scheme also gives you multiple tax benefits. These are: 

  • Contributions to EPF scheme are eligible for tax deduction under section 80C

  • Employer’ contribution is also tax exempt per section 10(11) and 10(12) of the Income Tax Act

  • Interest earned on EPF savings are also tax exempt

  • Zero tax on maturity amount

Calculating EPF Interest for FY 2018-19

Interest on EPF is calculated month-on-month but deposits are made to the PF account only at the end of the financial year. Below, we have a simple interest calculation on EPF of an employee.

  • Basic + DA = ₹ 10,000

  • Employee contribution = 12 % of 10,000 = ₹ 1200

  • Employer contribution = 3.67% of 10,000 = ₹367

  • Total monthly EPF contribution = ₹ 1567

Monthly interest for FY 2018-19 = 8.65/12 = 0.721%

If an employee started service on 1st April 2018, his/her contributions for the FY 2018-19 start from April.

Interest calculations:

  • PF Deposit in April = ₹ 1567

  • Interest generated in April = ₹ 0 (no interest for 1st month)

  • PF Balance (End of April) = ₹ 1567

  • PF Deposit in May = ₹ 1567

  • Total PF Deposit (April + May) = ₹ 3134

  • Interest generated in May = ₹ 3134 * 0.721% = ₹ 22.6

Interest will be calculated in the same way every month, and will be deposited only at the end of the financial year i.e March 2019. 

As you can see from the example above, your EPF deposits accumulate interests on a monthly basis and increase your savings. This scheme is an easy way to secure your future and have a happy retirement.

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