How to save Rs 1 crore with a basic salary of Rs 25,000 or less with Tax Benefit u/s 80C
Creating a corpus of Rs 1 crore on retirement is possible for most employees. However, for those who are low-earners, it might require a bit more active approach when it is invested in systemic manner to save Rs 1 crore or more for retirement. Depending entirely on the employees’ provident fund (EPF) may not be enough as the savings towards it are limited and even the rate of interest on PF is on the verge of reducing.
For a salaried employee, 12 per cent of the basic salary goes into the employees’ provident fund while a matching contribution is made by the employer. However, not the entire contribution of the employer goes into PF. As per the rules, 8.33 per cent of employer contribution, subject to a maximum of Rs 15,000, goes into the EPS, while only the balance goes into PF. This means, for those with a basic salary higher than Rs 15,000, a fixed amount of Rs 1,250 goes into EPS each month.
If the take-home salary of an employee is Rs 60,000 and assuming the basic salary to be about 40 per cent, the basic salary comes to about Rs 25,000.
Here is the break-up of EPF and EPS:
Basic Salary – Rs 25,000
Employee contribution to PF – Rs 3,000 ( 12 per cent of basic)
Employer contribution to EPS – Rs 1,250 ( 8.33 per cent of Rs 15,000)
Employer contribution to PF – Rs 1,750 ( Rs 3000 minus Rs 1250)
Total monthly contribution into PF – Rs 4,750 ( Rs 3000 plus Rs 1750)
Assuming an interest rate of 8.5 per cent on EPF balance and that the employee has 25 years to retire, the total PF balance will become approximately Rs 50 lakh on retirement. On p.a. basis.
The accumulated corpus falls short of Rs 50 lakh in order to reach an amount of Rs 1 crore. The employee has to, therefore, start SIP in equity mutual funds in order to accumulate Rs 50 lakh over 25 years.
For that, assuming an annualized growth rate of 12 per cent, one needs to invest Rs 2,600 per month for 25 years. The final corpus will be – Rs 50 lakh from PF and Rs 50 lakh from SIPs. On retirement, the total corpus will be Rs 1 crore, possible with a basic salary of Rs 25,000.
Even if, one invest in Equity based Mutual Funds, certain funds can provide even higher returns.
Even contribution to EPF & ELSS scheme of Mutual Fund is eligible to get tax benefit u/s 80C.
Author – MBA in Finance & Distributor of Mutual Fund.
Contact – reinsurancetime@gmail.com
(Update on 02.01.2019– Please note that For EPF, both the employee and the employer contribute an equal amount of 12% of the monthly salary of the employee. Employees can contribute more than 12% of their salary voluntarily, however the employer is not bound to match the extra contribution of the employee. The employers monthly contribution is restricted to a maximum amount of Rs 1,800. Even if the employee’s salary exceeds Rs 15,000, the employer is liable to contribute only Rs 1,800 (12% of Rs 15,000).
Author Bio
Small correction in the article. There is a limit of Rs. 1,800 as employee contribution towards EPF.