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You reap what you sow

Salaried people generally do not think much about their post-retirement means. They believe the mandatory monthly contributions to the Employees’ Provident Fund (EPF) with a matching contribution by the employer will be large enough to provide for in the twilight years.

However, this is not a correct assumption. Let us understand in greater details how the EPF scheme works so that one can get a fair idea of the EPF kitty one can expect on superannuation.

Purse count

The EPF scheme has two main constituents — employees’ provident fund and employees’ family pension fund.

An employee’s contribution of 12 per cent of the basic salary goes entirely to the employees’ provident fund — no part of the employee’s contribution goes to the employees’ family pension fund.

While the employer has to make a matching contribution of 12 per cent, a larger share of the employer’s contribution (equivalent to 8.33 per cent) goes to the employees’ family pension fund and the remaining 3.67 per cent to the employees’ provident fund.

However, there is a catch here. The employer’s contribution to the employees’ family pension fund is capped at a basic salary of Rs 6,500 of the employee. Though an employer can contribute 8.33 per cent of a basic salary higher than Rs 6,500, most employers don’t do that.

In other words, in most cases, the monthly contribution to an employee’s family pension fund is just Rs 541.45.

So, how much would you get from the employees’ family pension fund after retirement? According to the latest (2008) amendment to the Employees’ Family Pension Scheme, the monthly pension of a person who had joined services after 1995 will be calculated as: Pensionable salary x pensionable service in years/70.

Considering the maximum pensionable salary at Rs 6,500, the monthly pension works out to Rs 3,250 if the employee rendered 35 years of service.

Let us now turn to the employees’ provident fund. Given the maximum pension salary at Rs 6,500, many employers also calculate their own contribution of 3.67 per cent as well as the 12 per cent contribution of the employee to the employee’s provident fund on the basis of the basic salary of Rs 6,500.

In that case, the monthly contribution to an employee’s provident fund is Rs 1,019 (employee’s own contribution of Rs 780 plus the employer’s contribution of Rs 239).

Now, a monthly saving of Rs 1,019 will grow to Rs 23,37,466 after 35 years at an annual interest rate of 8 per cent. This EPF corpus will earn you a monthly interest income of Rs 15,583 when invested in a post office or a bank account earning an annual interest rate of 8 per cent.

Add to this the monthly pension income of Rs 3,250 from the employees’ family pension fund, and your gross monthly income post-retirement would be around Rs 19,000.

Now consider the expenditure. Assuming an annual inflation rate of a mere 3 per cent, after 35 years a monthly expenditure of Rs 19,000 will be equivalent to a monthly expenditure of Rs 6,500 at present.

Know your means

If your monthly expenditure is more than Rs 6,500 at present, you will take a big risk by completely depending on your EPF kitty for post-retirement means.

The return on EPF would have been higher had the Central Board of Trustees agreed to park 15 per cent of the fund corpus in equities.

Though the Union finance ministry had suggested in 2008 that the EPFO should invest 15 per cent of the corpus in equities to bolster returns, the labour ministry, the regulator of the EPFO, backed by pressure from trade unions, stuck to its 2003 investment pattern of investing only in high-rated debt instruments.

A proposal had been mooted late last year that the EPFO should start investing in equities of highest-rated public sector undertakings, but nothing has been decided yet.

If this proposal is accepted, it will serve a dual purpose — first, the equity exposure will boost the return to member subscribers and, second, it will help the Union government’s disinvestment programme. Till the time the EPFO decides on the equity investment, you can start it on your own.

Equity equation

If you are a salaried person, you cannot stop contributing to the EPF as it is mandatory. What you can, however, do is make a systematic monthly investment in a diversified equity mutual fund.

The monthly instalment amount could be Rs 720 (your contribution of 12 per cent on a basic salary of Rs 6,500) or Rs 541 (the employer’s contribution of 8.33 per cent to the employees’ family pension fund). Assuming a conservative 10 per cent annual return, you can amass between Rs 27,33,579 and Rs 20,53,981 in 35 years depending on the monthly investment amount you choose.

This way, you can ensure a Rs 50-lakh retirement corpus in addition to a monthly pension of Rs 3,250 from the employees’ family pension fund.

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