The individual considers various factors while thinking about the decision of investing in the right scheme. These factors include years of contribution, minimum principal amount, and many more. But the factor that stands out the most is the interest rate that is being provided with the savings scheme. Moreover, another important factor that remains in the back of the mind of the individual is the risk factor and the stability of the scheme in the market.
So, as you tend to reach a conclusion, you find that as a salaried employee, the savings scheme that is offering you the best benefits in terms of interest, maturity sum, tax benefits etc. Is the EPF scheme.
Now The question is What is the interest of the PF accumulations? So, in this article, we discuss the same and throw some light on its history too.
Interest Of The PF Accumulations
Since the establishment of the Provident fund act in 1952, the EPF scheme has been in the top of the investment’s list of salaried employees. Especially when an employee considers his/her savings scheme. In the early years of the establishment, EPF offered an interest rate of about 4.2%. Moreover, in the tenure 1989-2000 PF offered an interest rate of 12.00% which is the highest till now.
And as the early 2010s arrived the interest rate of 8.65% plateaued and since then it has remained to be the same. There have been some percentage of changes in the interest rate that remains to be around ±. 25% at most. So as of 2019-2020, the EPF interest rate stands to be 8.55%. This is one of the best in the industry and can not be undermined.
In order to give you better insight. let us discuss the breakup of the investment and the return that you achieve. According to the EPF guidelines, an employee is required to contribute 12% of his/her basic pay to his/her EPF account. Moreover, the employer provides the same contribution to the employee’s EPF account which is 12% of the employee’s basic pay.
The employee can choose to contribute more than the mentioned percentage of 12 %, up to the mark of 25% of the basic pay. But the employer is not liable to match the voluntary contribution of the employee. So the employer pays in a fixed percentage of 12% to the employee’s EPF account. So, in a normal case, a total of 24% of the basic pay of an employee is contributed to the employee’s, PF account.
But this is further subdivided into the EPS and EPF contribution. The employee’s percentage contribution that is 12% goes directly into your EPF account. Out of 12% of the employer’s contribution, 8.67% of the contribution goes to your EPS account and the rest to your EPF account directly.
EPS scheme is an employee pension scheme that provides a fixed monthly payment to an employee as and when the employee retires the age of 58 years. Also, the employer has to serve/contribute to his/her PF account for at least 10 years before retirement.
So let us consider as an example with a break up:
Let say you have a basic pay of Rs.50,000 in your salary slip. Now let us see the division of the EPF contributions in detail:
Your contribution to EPF :
- If you provide 12% of your basic pay it would be about 6000 Rs that you will add to your EPF account.
- If you obliged to pay 10% then it would make up 5000Rs
Your employer’s contribution:
Considering the employer provides 12% to you.
- In accordance with the first, the employer contribution that is 3.67% would add 1835 Rs to your EPF account per month.
- Then comes in the EPS cut that is 8.33% which would make 4165 Rs in total. However, For EPS the highest amount on which it is to be calculated can’t exceed the mark of 15000. Therefore, your employer can only contribute 1249.5 Rs to the EPS. Don’t worry the extra that is (4165-1249.5=)2915 Rs is then added to your EPF account. The rest of the sub-division amount is awarded to the EPF service. You don’t receive any amount from it to your EPF.
- If your contribution is 12 % then Rs (6000+1835+2915)=Rs 10730. And an interest rate of 8.55% is further subjected to this sum of amount.
So, a total of 11647.415 is credited to your EPF account. But remember the interest that is provided to you account is credited at the end of the accounting year.
EPF had transformed the lives of many employees. It has allowed individuals to live their dreams even after retirement. This has been possible only because of the benefits it provides in terms of taxes, maturity withdrawals, etc. The interest rate that has been in place for the scheme is unmatchable. Hence an employee should always consider EPF seriously for their retirement plans.