Have a basic salary of Rs 25,000? Here's how you can save Rs 1 crore till retirement

Under the employees’ provident fund, 12 per cent of the basic salary goes into EPF account, while a matching contribution is made by the employer. However, not the entire contribution of the employer goes into PF.

KEY HIGHLIGHTS

• As per the rules, 8.33 per cent of employer contribution, subject to a maximum of Rs 15,000, goes into the EPS, while the balance goes into PF.
• For those with a basic salary higher than Rs 15,000, a fixed amount of Rs 1,250 goes into EPS each month.
• For someone with a basic salary above Rs 50,000, creating a retirement corpus of Rs 1 crore with EPF is not so difficult.

Employee Provident Fund (EPF)

Employee Provident Fund is one of the safest ways to save for your retirement. Nowadays, having a retirement corpus below Rs 1 crore is not ideal as most people now live longer due to advanced medical facilities and this means they have to live longer on their savings and investment proceeds. While creating a corpus of Rs 1 crore on retirement is possible for most employees, for those who are low-earners, it might require a bit more active approach. 

For someone with a basic salary above Rs 50,000, creating a retirement corpus of Rs 1 crore with EPF is not so difficult. For someone with a basic salary of just Rs 25,000, depending entirely on the EPF may not be enough as the savings towards it is limited and even the rate of interest on PF is low.

It may be noted that under the employees’ provident fund, for a salaried employee, 12 per cent of the basic salary goes into EPF account while a matching contribution is made by the employer. However, not the entire contribution of the employer goes into PF. As per the rules, 8.33 per cent of employer contribution, subject to a maximum of Rs 15,000, goes into the EPS, while the balance goes into PF. This means, for those with a basic salary higher than Rs 15,000, a fixed amount of Rs 1,250 goes into EPS each month.

So, if the take-home salary of an employee is Rs 60,000 and assuming the basic salary to be about 40 per cent, the basic salary will be around Rs 25,000. Here's how the EPS and PF contribution will look like

• Basic Salary: Rs 25,000
• Employee contribution to PF: Rs 3,000 (12% of basic)
• Employer contribution to EPS: Rs 1,250 (8.33% of Rs 15,000)
• Employer contribution to PF: Rs 1,750 (Rs 3,000 minus Rs 1,250)
• Total monthly contribution into PF: Rs 4,750 (Rs 3,000 plus Rs 1,750)

Going by 8.5 per cent rate of interest on EPF balance and assuming that the employee still has 25 years to retire, the total PF balance will be around Rs 50 lakh on retirement. Note that the interest rate on PF is calculated on the monthly running balance of the PF contributions. In this case, the returns have been considered on a per annum basis.

Another Reading: How to check your EPF balance online

As you can see very clearly that the accumulated corpus in this scenario falls short of Rs 50 lakh in order to reach the amount of Rs 1 crore. So, in order to reach the Rs 1 crore retirement corpus target, the employee has to start SIP in equity mutual funds in order to accumulate the remaining Rs 50 lakh over the next 25 years.
Now, assuming an annualised growth rate of 12 per cent, one needs to invest around Rs 2,600 per month for 25 years, after which the final corpus will be - Rs 50 Lakhs from PF and Rs 50 Lakhs from SIPs. On retirement, the total corpus will be Rs 1 crore and this is how one can manage this is with a basic salary of Rs 25,000.

It is worth mentioning that with age and as you grow in your career, your income increases. So, you can increase your investments to accumulate a higher corpus after retirement.

Hope this article from The Finance Gyan helps!!