The Employees' Provident Fund (EPF) is one of the key retirement savings schemes available for salaried employees in India. EPF is designed primarily as a retirement-focused savings scheme. Employees contribute a prescribed portion of their basic salary and dearness allowance, while employers also make contributions as per applicable rules.
The employees' and employers' contributions, along with interest credited to the account, can help build a sizeable retirement corpus over the long term. After years of savings, when an employee reaches a notable stage of Rs 1 or Rs 10 lakh, an important question is whether to withdraw the money for a near-term requirement or leave it invested for future needs.
To understand the potential impact of compounding, consider an initial EPF balance of Rs 10 lakh that earns an average annual return of 8.25% for 10 years.
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What Happens To Rs 10 Lakh Left Untouched?
Your Rs 10 lakh Provident Fund (PF) corpus could grow significantly in 10 years if left untouched at the current interest rate of 8.25% per annum:
Initial EPF balance: Rs 10 lakh
Tenure: 10 years
Current EPF interest rate: 8.25% per year
Estimated interest earned: Rs 12.09 lakh
Total corpus after 10 Years: Rs 22.09 lakh
At this assumed rate, the Rs 10 lakh balance could grow to approximately Rs 22.09 lakh over 10 years, without considering any additional contributions.
The balance earns interest at the rate declared for the relevant financial year. As this is added to the account, the accumulated amount can itself earn interest in subsequent years. This creates the effect of compounding over time.
The calculation highlights how leaving retirement savings invested for longer can potentially increase the corpus through compounding. However, the actual EPF corpus may differ because the interest rate can change from one financial year to another.
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In a nutshell, withdrawing retirement savings prematurely can reduce the amount available for long-term wealth creation, while leaving the money invested can give compounding more time to work.
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