How Changes in Salary Affect Your EPF with an EPF Calculator?

Planning for the future is important, but it can take time to know where to start. An EPF calculator is a great way to estimate how much money you might have saved up for retirement. This article will explain EPF and how increasing or decreasing your salary impacts your savings. It will also provide examples to help you understand. Read on to learn how to take control of your financial future!

What is EPF?

EPF stands for Employees’ Provident Fund. It is a retirement savings program run by the government of India. The goal of EPF is to help employees save money for when they retire. The employee and the employer contribute a percentage of the employee’s basic monthly salary to the EPF account. This money earns interest over time. 

When the employee eventually retires, they can withdraw the total EPF savings – their contributions, their employer’s contributions, and all the interest earned. This ensures the employee has a decent sum to cover expenses after retiring.

How does Salary Impact EPF Savings?

The money saved in your EPF account is directly linked to your basic monthly salary. Let’s understand how increasing or decreasing your basic pay impacts your corpus.

Increased Salary

If your basic salary goes up, your monthly EPF contributions will also automatically increase.  

For example, Ramesh currently earns a basic pay of ?35,000 per month. His employer also matches Ramesh’s 12% contribution with another 12%. 

So every month, ?8,400 ((12% of ?35,000) x 2) gets added to Ramesh’s EPF account.

If Ramesh gets a raise of ?7,000 per month, his new basic will be ?42,000. Now, 12% of his basic pay equals ?10,080. Along with his employer’s matching ?10,080, the total monthly EPF contribution rises to ?20,160.

As you can see, Ramesh’s PF savings get a nice boost, thanks to his increased salary!

Reduced Salary  

Conversely, if your basic pay decreases for any reason, your EPF contributions will automatically decrease as well.

Let’s consider Priya, who currently earns ?45,000 as a basic salary. Her monthly EPF contribution is ?10,800 (12% of her basic). Her employer also pitches in ?10,800. So, a total of ?21,600 goes into Priya’s EPF account every month.

Priya has decided to downgrade to a less demanding job profile with a lower basic pay of ?38,000. Her EPF share will now be 12% of ?38,000, which is ?9,360. Including her employer’s matching ?9,360, only ?18,720 gets added to her PF monthly, instead of the earlier ?21,600.

Over the long run, this ?2,880 monthly reduction severely slows Priya’s retirement savings in her PF account.

Using an EPF Calculator

How will these ups and downs impact your total retirement savings? That’s where an EPF calculator comes in handy!

An EPF calculator is a simple online tool that estimates your future PF balance. All you do is enter details like:

  • Current basic pay
  • Expected years of service  
  • Current age
  • Expected retirement age 

Based on these inputs, the calculator forecasts how much could be available in your EPF account when you retire.

Let’s see this in action through some examples.

Example 1: Changing Jobs 

Akash, 28, currently earns ?60,000 in basic pay, with a 15% employer PF contribution. He expects to work until age 60. 

Inputs into EPF Calculator:

Age: 28 years

Monthly Basic: ?60,000 

Employer EPF rate: 15% 

Expected Retirement Age: 60 years

Results:

Total contributions till age 60 = ?1.11 crore 

Interest earned = ?1.99 crore  

Total EPF savings at age 60 = ?3.10 crore

Now Akash gets a new job offer with a higher basic of ?80,000 but a lower company EPF rate of 12%. How does this impact his total savings?

Updated Inputs:

Age: 28 years

Monthly Basic: ?80,000

Employer EPF rate: 12% 

Expected Retirement Age: 60 years

Revised Results:

Total contributions till age 60 = ?1.25 crore

Interest earned = ?2.23 crore 

EPF savings at age 60 = ?3.48 crore

So despite the lower employer contribution percentage, the sheer increase in Akash’s basic salary helps grow his PF savings corpus by nearly ?40 lakhs!

Example 2: Changing Life Goals

Sarah currently saves ?25,000 monthly through EPF contributions. She is 30 years old and plans to retire at age 55. 

Inputs:

Age: 30 years 

Current EPF savings: ?3.5 lakhs

Monthly EPF contribution: ?25,000

Expected retirement age: 55 years

Results: 

Total contributions till age 55 = ?1.35 crore

Interest earned = ?58.92 lakhs  

EPF savings at age 55 = ?1.94 crore

Sarah manages to amass sizable wealth and decides she can retire early at 50 instead, which is her new goal. Retiring 5 years sooner reduces her contributions period significantly.  

Updated inputs: 

Retirement age: 50 years (from 55 years)  

Revised results:

Total contributions = ?1.05 crore 

Interest earned = ?39.37 lakhs

EPF savings at age 50 = ?1.44 crore (?50 lakh less than original target)

So you can see how a small change like early retirement can massively impact Sarah’s carefully built-up PF savings. The reduced contributions period results in her accumulating ?50 lakhs less for her goals.

Key Takeaways

As the examples illustrate, regular appraisal of your retirement planning is crucial to account for changing life circumstances. The key lessons are:

  • Increasing your basic salary directly boosts your overall PF savings thanks to higher monthly contributions   
  • Reducing your basic pay has the opposite downsizing effect on total EPF funds  
  • Reassess your retirement planning when life situations or goals change 
  • An EPF calculator helps determine the impact of such changes on your retirement funds
  • Make timely adjustments (e.g. increasing voluntary PF contributions) whenever required 

Adopting this dynamic assessment approach is vital to building a sufficient retirement corpus through EPF.

How to Increase your EPF Savings?

While salary hikes contribute the biggest piece to your PF bank, you can also take proactive steps to maximise returns:  

  1. Ensure full employer contribution: Some organisations cap employer share lower than the 12% norm. If so, negotiate to restore the full 12% input.
  2. Make voluntary contributions: Over and above the standard 24% contribution split between you and your employer, voluntarily contribute an additional desired amount to your EPF. 
  3. Withdraw only when necessary: Minimise premature withdrawals and let your savings compound over a longer horizon for exponentially higher gains.
  4. Alternate saving options: Invest surplus income in instruments like PPF calculator and mutual funds to diversify risk and returns.
  5. Monitor interest changes: Check the PF statement regularly to track interest payouts. Higher rates directly build your principal amount. 

Conclusion

As you earn more over the years, your EPF savings also grow. Using an online EPF calculator can help you see how different savings rates can impact your future. By keeping your extra investments separate from your EPF, you can save for your retirement while enjoying some luxuries. Staying invested in your EPF until it matures can give you much money to rely on when you retire.

 

Rylie Holt