Rs 1,800 EPF vs 12% of basic pay: Choosing Rs 1,800 monthly contribution can increase your in-hand salary, but is it worth?

Many Employees’ Provident Fund (EPF) subscribers found themselves in a dilemma while choosing their monthly PF contribution. If they choose a low amount, they get a high in-hand salary, but it may come with high tax on salary and less EPF retirement corpus. If they pick a high EPF contribution, they may gather a larger corpus, but a low in-hand salary may leave them with short of money for their immediate needs or other investments.

For employees earning less than Rs 15,000 of monthly basic pay and dearness allowance (DA), PF contributions from the employee and employer’s sides are mandatory. For employees earning more than Rs 15,000 as basic pay, Employees’ Provident Fund Organisation (EPFO) rules, however, allow contributions to be restricted to the statutory wage ceiling of Rs 15,000 per month. So the mandatory employee contribution becomes 12% × Rs 15,000 = Rs 1,800 per month. Contributions above this are voluntary or based on employer policy.

Also Read: 8th Pay Commission HRA calculator: Can HRA go up to Rs 1,93,000/month? HRA estimates for Level 13-18 employees at 2.0, 2.1, 2.28, 2.57 fitment factors


But if they get a chance to contribute up to 12% of their basic pay, should they go for it keeping a long-term, high retirement corpus in focus, or, should they focus on their immediate needs and opt for a high in-hand salary and Rs 1,800 monthly EPF contribution?

Contributing Rs 1,800/month in EPF? Should you go for higher amount?

Anita Basrur, partner, direct taxation, Sudit K. Parekh & Co LLP, told ET Wealth that reducing EPF contribution from 12% of actual basic salary to the statutory minimum Rs 1,800 per month can significantly increase take-home salary, but it comes at the cost of a much lower retirement corpus.

The government currently provides an 8.25% interest rate on EPF contributions. Deposits in EPF up to Rs 1.5 lakh/financial year provides tax benefit under the old tax regime. Under the new tax regime, employees get tax benefit on the employer’s EPF contributions, up to 12% of their basic pay.

Also Read: 8th Pay Commission salary hike: How HRA can increase for Level 1-10 employees at 2.0, 2.1, 2.28, 2.57 fitment factors

The interest earned and the maturity amount are also tax-free if the EPF account is five years old or more. A subscriber many increase their EPF contribution with a rise in their basic pay, translating into higher retirement corpus.

The advantages of a low EPF contribution are higher disposable income, flexibility in investments and potential higher returns, explains Basrur.

“However, keeping it at the minimum level can also reduce retirement corpus. If investment is not disciplined, there will be no saving. Disposable amount invested in market means higher risk as compared to EPF and a higher taxable salary,” says Basrur.

How Rs 1,800/month EPF contribution can increase in-hand salary

Basrur says on a Rs 10 lakh salary where the basic pay is 50% of the overall pay, the monthly in-hand salary increase can be Rs 3,200, or Rs 38,400/year.

Also Read: 8th Pay Commission salary calculator: How much could HRA increase for Level 1-10 employees under 2.0 to 2.57 fitment factors?

Ankit Bagadia, director, business, BankBazaar, told ET Wealth Online that on annual salary packages of Rs 12 lakh and Rs 15 lakh, where the basic pay is 50% of the total pay, monthly increases can be Rs 4,200 and Rs 5,700, respectively.

Particulars	Employee 1	Employee 2	Employee 3
Approx. Annual Salary	₹10 lakh	₹12 lakh	₹15 lakh
Monthly Basic Salary	₹ 41,667	₹ 50,000	₹ 62,500
Current Monthly EPF Contribution (12%)	₹ 5,000	₹ 6,000	₹ 7,500
Capped Monthly EPF Contribution	₹ 1,800	₹ 1,800	₹ 1,800
Increase in Monthly Take-home Salary	₹ 3,200	₹ 4,200	₹ 5,700
Increase in Annual Take-home Salary	₹38,400	~₹50,000	~₹68,000

Note: These are pre-tax figures. In-hand salary increase may change post tax.

Long-term impact of high in-hand salary and low-EPF contribution

Arindam Banerjee, professor (finance) programme director, Master of Applied Finance & Wealth Management, SP Jain School of Global Managements, says that the flexibility of having a high in-hand salary might be really helpful for younger workers with aggressive financial objectives, but there is a flip side that many underestimate.

Banerjee says take the example of an employee earning a monthly basic pay of Rs 41,667 and assume a modest annual raise of 5% in income.

The employee contributes 12% (or Rs 5,000 per month in year one) and the employer matches Rs 5,000 (of which 8.33% goes to the EPS and the balance to the EPF). With wage growth included in, this, a retirement corpus in the range of Rs 1.8 to Rs 2 crore from the employee’s side alone over 30 years, compounding at roughly 8.25%. Now transfer over to a flat Rs 1,800 per month. The overall contribution of the employee throughout the 30 years is cut significantly, we are looking at about Rs 6.48 lakh in total savings as against more than Rs 30 lakh under the 12% method.

Parameter	Current EPF Contribution (12% of Basic Pay)	Flat EPF Contribution (₹1,800 per Month)
Monthly basic pay (Year 1)	₹ 41,667	₹ 41,667
Annual salary increment (assumed)	5%	5%
Employee EPF contribution (Year 1)	₹5,000/month (12% of basic pay)	₹1,800/month
Employer contribution (Year 1)	₹5,000/month (8.33% to EPS, balance to EPF)	Not specified
Contribution pattern	Increases with salary growth	Fixed at ₹1,800/month
Investment period	30 years	30 years
Assumed annual EPF return	~8.25%	~8.25%
Employee's total contribution over 30 years	More than ₹30 lakh	About ₹6.48 lakh
Estimated retirement corpus from employee's contributions	₹1.8–2 crore	Rs 28.2 lakh
Overall impact	Higher retirement savings through increasing contributions linked to salary	Total savings reduced substantially because contributions remain fixed

Calculations by Arindam Banerjee

What if you invest savings from EPF into equities

Some EPF subscribers may channelise their savings from monthly EPF contributions to equity investments, where they may generate higher returns in the long term compared to the EPF return. In the example above, the monthly amount saved through keeping EPF contributions fixed at Rs 1,800 is Rs 3,200. One can invest the saved amount in equities and increase the investment amount by 5% every year with a rise in the pay by the same proportion. If the investor gets 12% annualised returns from that amount, the corpus created in 30 years can be nearly Rs 1.50 crore.

Rs 1.5 cr corpus calculations from EPF savings

Parameter	Value
Monthly investment	₹ 3,200
Annual step-up in investment	5%
Expected annualised return	12%
Investment period	30 years
Estimated corpus at maturity	₹1.5 crore

Higher in-hand salary vs Higher EPF contributions: Which should you choose?

A higher-in hand salary can complete many of your immediate needs that also include investments in schemes that can generate potentially higher returns. But a higher EPF contribution can also make you gather a high retirement corpus. Your priorities may be either of them or both. But how should decide about it?

Banerjee says the Rs 1,800/month EPF contribution makes sense if you’re in your 20s or early 30s with a lengthy investing horizon, a sound grasp of stock markets and already have other debt-free assets developing your retirement basis, then diverting the surplus towards a diversified equity portfolio can be a reasonable choice.

Bagadia feels reducing your EPF contribution can make sense if you already have a strong retirement plan and are committed to investing the additional take-home pay regularly.

Basrur opines that choosing the minimum EPF amount is good if you are young and have a long way to retirement or if you disciplined in investing every rupee of additional take home salary.

But Basrur advises picking 12% EPF contribution if someone’s estimated savings for retirement are insufficient, they are risk averse or not disciplined in investment.

“It is, however, important to understand that the real winner depends less on returns and more on discipline. Most people fail not because equity underperforms, but because the additional take-home gets spent rather than invested,” says Basrur.