How does a lower EPF contribution impact your retirement savings?

Here’s how reducing the EPF contribution rate (from 12% to 10%) can impact your take-home pay, retirement corpus, and ultimately changes your cost-to-company (CTC).

How does a lower EPF contribution impact your retirement savings

An increase in your take-home pay is undoubtedly a good thing, right? Well, you may need to give it a second thought, especially since the government is considering decreasing the Employee Provident Fund (EPF) contribution rate from 12% to 10%[1]. 

Let’s discuss how this change impacts different aspects of your salary and savings, such as your take-home pay and your retirement corpus.

What is EPF?

EPF or Employee’s Provident Fund is a retirement benefits scheme available to all employees working in an establishment that has 20 or more employees.[2] Under this scheme, you have to contribute 12% of your basic pay, towards the fund, and your employer puts in an equal contribution. At the time of retirement, you receive a lump sum amount that includes your contribution as well as your employer’s, with interest.

Related: Why ignoring to plan for retirement can be financially damaging 

Impact of a rate cut on your take-home pay

Currently, your contribution towards EPF is 12% of your basic pay plus dearness allowance and retaining allowance. Now, if your minimum PF contribution decreases to 10%, your take-home pay increases. Let’s consider an example to illustrate the point. 

Imagine you earn a basic pay of Rs 50,000. If the EPF is 12%, you contribute Rs 6000 to the fund and your employer contributes an equal amount. But if it is 10%, you contribute only Rs 5000. This means your take-home pay increases by Rs 1000. If you are a conscientious investor, you can deploy this extra income into mutual funds for higher financial growth in future.

Impact on your CTC

If you look at the Cost-to-Company (CTC) breakdown provided by your employer, you will find that the EPF contribution of your employer is a part of the CTC. Now, if the EPF rate comes down to 10%, your employer’s contribution to the fund also reduces. This means your CTC comes down automatically.

Related: Tax-saving components of your CTC 

How does a lower EPF contribution impact your retirement savings?

Impact on your retirement corpus

EPF is essentially a retirement savings scheme. So any change in the contribution rate means your retirement corpus takes a big hit. Any reduction in the EPF contribution translates to a lower retirement corpus. 

For example, let’s suppose you are 30 years old and earn a basic salary of Rs 50,000 per month. If you retire 30 years later at the age of 60, your retirement corpus would be around Rs 1.17 crore (assuming an EPF contribution rate of 12% and interest rate of 8.55%). However, if the contribution rate is 10%, your corpus comes down to Rs 1.02 crore; a 12.5% decrease in the total amount you would have on retirement![3]

Related: Employees are now allowed to withdraw 75% of EPF balance after 1 month of unemployment 


A reduction in the EPF contribution rate seems to spell bad news. However, you should not be depending solely on your EPF corpus to fund your retirement. Consider other options, such as contributing beyond the 12% of basic pay. This is possible by contributing to your Voluntary Provident Fund (VPF). Alternatively, you could consider investing in Equity Mutual Funds for high returns over the long term. 


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