Your EPF Can Make You Retire Rich

Fact or Fiction – if you work for close to 35 years, you can retire with a sum of close to two crores from your Employee Provident Fund account. Fiction you would say, after all how can the paltry contributions made to the EPF account could possibly turn into crores. However, you would be pleasantly surprised to know that this is quite true. You can in fact reach a corpus as huge as two crores riding easily on your monthly Provident Fund contributions.

One often forgets that each month along with your own contribution to your Provident Fund account which is deducted from your salary, your employer makes an equivalent contribution to your account. Hence your contribution is actually being doubled and this when compounded annually at the new interest rate of 9.5%, the accrued amount after almost 35 years of service, sits at a comfortable two crores.

Let's look at a quick example to see in detail how the meagre additions each month amount to the gigantic total:

Your monthly CTC including all your perks is XYZ amount. Out of this amount, let's assume that a modest Rs 25,000 is the basic component of your monthly package. The provident fund contribution on the basic salary is 12%. This means that out of your Rs 25,000 a deduction of Rs 3,000 goes to your EPF account each month. Add to this the employer's contribution of an equivalent amount, which means a total of Rs 6,000 is deposited each month in your EPF account annually amounting to Rs 72,000.

Not bad so far, but the magic is yet to happen. The interest rate on the EPF account has been revised to a whopping 9.5%. This means that at the end of the year Rs 6,840 gets added to your Rs 72,000 in the account getting you to a total of Rs 78,840.

Now you would think, so what – next year also the same thing will happen. You will end up depositing Rs 72,000 to your account. But you forget that the interest this year will not be accrued on just Rs 72,000 but also on the previous year's amount of Rs 78,840. This means the interest gets accrued on Rs 15,0840 which will fetch you an interest of Rs 14,330 and an eventual total Rs 1,65,170 just by the end of the second year. Going at this rate, even if you don't ever get a hike in your basic salary (which is very unlikely) you would still sit at an approx two crores after 35 years.

So next time you see the annoying deduction in your salary slip – don't frown. That small deduction is going to come back to you in the form of a very luxurious retirement.