EPF Wealth Trick: Rs 1.3 CRORE corpus with Rs 20000 salary

epf wealth trick: rs 1.3 crore corpus with rs 20000 salary

(Authored by Samta Barnali Achintya)

EPF wealth: Many people start their career with a basic salary of around18,000 or 20,000 per month with huge aspirations. However, given the inflation and changing market dynamics, many individuals aspire to build huge corpus and save tax as much as they can.

So, here we will understand how a person earning basic salary of Rs. 20,000 per month can create Rs. 1.30 crore tax-free corpus.

Role of EPF

So, here comes the role of EPF or Employees Provident Fund. EPF is a central government retirement fund plan that provides the account holder with a lump sum and a monthly annuity upon maturity. Furthermore, EPF is one of the few investment options classified as exempt-exempt-exempt (E-E-E).

Generally, an individual contributes a minimum of Rs 1,800 and a maximum of 12 percent of their basic salary to their EPF account. Their employer matches this contribution.

Furthermore, the employer’s share, 8.33 percent goes to the Employee Pension Fund (EPS), and 3.67 percent goes to the EPF.

The employee earns an annual compound interest of 8.25 percent on the overall contributions, including those from the employer. This interest, along with deposits up to Rs 1.50 lakh per financial year and the maturity amount, remains tax-free.

Contributions exceeding 12 percent of the basic salary are termed as voluntary provident fund (VPF) contributions and are subject to taxation. However, the employer does not contribute more than 12 percent, even if the employee opts for VPF.

EPF offers a tax-free corpus, and consistent monthly transfers into the account ensure continuity of investment. Many financial experts advocate maximising contributions to EPF.

As your salary will increase overtime, you have the flexibility to increase contributions. Moreover, you can increase your contributions annually by five or ten percent, depending on your investment capacity.

Now, coming to the calculations, suppose, you are starting with a basic salary of Rs 20,000, a 12 percent monthly contribution, and annual increments of five percent, you can create a tax-free corpus of Rs 1.29 crore by the age of 60, with a total contribution of Rs 33.97 lakh.

Here are the calculations:

Monthly Contributions: You would contribute Rs 3,134 to your EPF account, which includes your contribution of Rs 2,400 and the employer’s contribution of Rs 734.

Contribution Period: You would continue these contributions for 35 years, ensuring a long-term investment horizon.

Annual CAGR Yield: With an annual compounded growth rate (CAGR) yield of 8.25%, your investments would grow steadily over time.

Annual EPF Step-Up: Additionally, you would increase your EPF contributions by 5% annually, allowing for accelerated wealth accumulation.

Your Contribution: Over the 35-year contribution period, your total contribution would amount to Rs 33.97 lakhs.

Final Corpus: By the time you reach the age of 60, your EPF account would have grown to a tax-free corpus of Rs 129.89 lakhs, providing a substantial retirement fund.

Thus, if you delay your investment by ten years and start contributions at the age of 35, you can create a tax-free corpus of Rs 47.80 lakh at the age of 60, with a total contribution of Rs 17.95 lakh, under the same salary and increment conditions.

Considering EPF contributions starting at the age of 35

Monthly Contributions: You would still contribute Rs 3,134 monthly to your EPF account.

Contribution Period: However, the contribution period would be shorter, spanning 25 years.

Annual CAGR Yield: The annual CAGR yield of 8.25% would still apply, ensuring consistent growth.

Annual EPF Step-Up: Similar to the previous scenario, you would increase your EPF contributions by 5% annually.

Your Contribution: With a shorter contribution period, your total contribution would amount to Rs 17.95 lakhs.

Final Corpus: Despite the shorter contribution period, your EPF account would still grow to a significant tax-free corpus of Rs 47.80 lakhs by the time you reach 60 years of age.

Thus, to achieve a great amount of tax-free corpus, you need to start early and have patience.

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