PF Salary Deduction: How Much Money Will You Get After Retirement? Know Rules

PF: Every month, right after the salary is credited, a portion of money is quietly deducted, and most individuals are only aware that it is for PF. However, very few realize that part of this deduction contributes to a significant fund for the future, while the other portion is allocated for the pension received post-retirement. This is why, despite millions of workers having their money deducted for years, they often cannot determine whether they will receive crores of rupees upon retirement or just a few thousand as a pension.

In reality, the money deducted from salaries is divided into two segments: the Employee Provident Fund (EPF) and the Employees Pension Scheme (EPS). Each serves distinct purposes, and the benefits received upon retirement differ significantly.

What distinguishes EPF from EPS?

EPF functions as a savings fund where both your contributions and your employer’s are deposited, accruing interest annually. Currently, the EPF offers an interest rate of 8.25%. By utilizing long-term savings and the power of compounding, you can accumulate a considerable retirement fund.

Conversely, EPS is not a savings scheme. It does not accumulate a large sum of money in your name, nor does it generate interest. Its primary function is to provide a fixed monthly pension after retirement. Thus, while EPF offers a substantial lump sum, EPS ensures a steady monthly pension.

Where does the salary deduction go?

Each month, 12% of an employee’s basic salary is directed into PF, with the employer matching this contribution. However, not all of the employer’s contribution is allocated to EPF. The entire 12% from the employee is directed to EPF, while 8.33% of the employer’s 12% goes to EPS, and the remaining 3.67% is deposited into EPF. It’s important to note that there is a cap on the amount that can be contributed to EPS, with a maximum of Rs 1,250 per month being deposited into EPF.

How can EPF build a fund worth crores?

The real power of EPF lies in compounding. If an individual consistently contributes to their PF for 30-35 years from the start of their career and refrains from making withdrawals, they could amass a corpus ranging from ₹2 crore to ₹3.5 crore by the time they retire. However, many individuals tend to withdraw their PF when switching jobs, which disrupts the long-term compounding effect and leads to considerable losses.

How much pension can one expect from EPS?

In this context, the maximum pensionable salary cap is set at Rs 15,000. This implies that even after a lengthy service period, the pension under standard EPS regulations only amounts to approximately Rs 8,571 per month. Presently, the minimum EPS pension stands at Rs 1,000, but reports suggest that the government is contemplating raising it to Rs 3,000.