Creating a corpus of Rs 1 crore on retirement is possible for most employees. However, for those who are low-earners, it might require a bit more active approach to save Rs 1 crore or more for retirement. Depending entirely on the employees’ provident fund (EPF) may not be enough as the savings towards it are limited and even the rate of interest on PF is low.

For a salaried employee, 12 per cent of the basic salary goes into the employees’ provident fund 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 only 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.

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 comes to about Rs 25,000.

Here is the break-up of EPF and EPS:

  • Basic Salary – Rs 25,000
  • Employee contribution to PF – Rs 3,000 ( 12 per cent of basic)
  • Employer contribution to EPS – Rs 1,250 ( 8.33 per cent of Rs 15,000)
  • Employer contribution to PF – Rs 1,750 ( Rs 3000 minus Rs 1250)
  • Total monthly contribution into PF – Rs 4,750 ( Rs 3000 plus Rs 1750)

Assuming an interest rate of 8.5 per cent on EPF balance and that the employee has 25 years to retire, the total PF balance will become approximately Rs 50 lakh on retirement. The interest rate on PF is calculated on the monthly running balance of the PF contributions. Here, we have considered returns on per annum basis.

Watch Video: How To Withdraw PF Online

The accumulated corpus falls short of Rs 50 lakh in order to reach an amount of Rs 1 crore. The employee has to, therefore, start SIP in equity mutual funds in order to accumulate Rs 50 lakh over 25 years.

For that, assuming an annualised growth rate of 12 per cent, one needs to invest Rs 2,600 per month for 25 years. The final corpus will be – Rs 50 lakh from PF and Rs 50 lakh from SIPs. On retirement, the total corpus will be Rs 1 crore, possible with a basic salary of Rs 25,000. And, remember, with age and you grow in your career, your income increases. One can, therefore, increase savings with a rise in income to accumulate a higher corpus after retirement.