How Rao's Salary Deductions Secure His Future
Meet Mr.Rao, a 23-year-old Quality Analyst working at iCorpture. Like most salaried employees, he receives a monthly salary slip, but he often wonders:
"Why does ₹1,800 get cut every month for PF? And what is this ₹157 ESI deduction?"
If you've had the same question, this story will break down Employee Provident Fund (EPF) and Employee State Insurance (ESI) in simple terms—so you never feel confused about these deductions again.
Chapter 1: The Mysterious PF Deduction
What is EPF?
The Employee Provident Fund (EPF) is a government-backed retirement savings scheme. Here's how it works:
- 12% of your basic salary is deducted and sent to your EPF account.
- Your employer also contributes 12% (but only 3.67% goes to EPF; 8.33% goes to EPS—Employee Pension Scheme).
Example from Rao's Payslip:
- Basic Salary = ₹15,000
- Rao's Contribution (12%) = ₹1,800 (12% of ₹15,000 = ₹1,800 this is capped by govt at ₹15,000 for PF purposes).
- Employer Contribution (8.33% + 3.67%) = 12%
- Total Monthly = ₹1800 (Rao) + ₹550 (Employer) + ₹1,250 EPS is not part of your PF balance – it’s a separate pension fund.
| Component | Calculation | Amount (Monthly) | Where It Goes |
|---|---|---|---|
| Employee Share | 12% of ₹15,000 | ₹1,800 | Rao's PF Account |
| Employer EPF | 3.67% of ₹15,000 | ₹550 | Rao's PF Account |
| Employer EPS | 8.33% of ₹15,000 | ₹1,250 | Pension Scheme |
| Total PF Growth | ₹1,800 + ₹550 | ₹2,350 | Actual PF balance |
Why Should Rao Care About EPF?
- Retirement Corpus: EPF grows with 8.15% interest (2024 rate)—higher than most bank FDs!
- Tax-Free Withdrawal: After 5 years, PF withdrawals are tax-free.
- Emergency Fund: Can withdraw for medical emergencies, home loans, or unemployment.
💡 Pro Tip: Check your EPF balance via UAN Portal (https://unifiedportal-mem.epfindia.gov.in/)
Chapter 2: The Small but Mighty ESI Deduction
What is ESI?
The Employee State Insurance (ESI) is a health insurance scheme for employees earning up to ₹21,000/month.
- Employee Contribution: 0.75% of gross salary
- Employer Contribution: 3.25% of gross salary
Example from Rao's Payslip:
- Gross Salary = ₹21,000
- Rao's Contribution (0.75%) = ₹157 (Values rounded down to nearest rupee as per ESI rules.)
- Employer's Contribution (3.25%) = ₹682
- Total Monthly ESI Deposit = ₹157 (Rao) + ₹682 (Employer) = ₹839/month
Year-to-Date (YTD) ESI Paid: ₹1884 (Rao's share).
Why Should Care About ESI?
- Free Medical Care: Covers doctor visits, medicines, hospitalization at ESI hospitals.
- Sick Pay: If Rao falls ill, he gets 70% of salary as cash benefit for up to 91 days.
- Maternity Benefit: Female employees get paid leave for 26 weeks.
⚠️ Note: If Rao's salary exceeds ₹21,000/month, ESI stops deducting.
Chapter 3: The Bigger Picture – Why These Deductions Matter
Rao initially thought: "Why not take the full salary instead of these cuts?" But his senior colleague, Ravi, explained:
1. EPF is a Forced Savings Plan
- Without PF, Mr.Rao might spend all his salary and have no retirement fund.
- Over 30 years, his ₹2,350/month EPF could grow to ₹50+ lakhs with compounding interest!
2. ESI = Free Health Insurance
- A private health plan with similar coverage would cost ₹500–1,000/month.
- ESI gives cashless treatment—saving Rao from sudden medical bills.
3. Tax Benefits
- EPF contributions qualify for Section 80C deduction (up to ₹1.5 lakh/year).
- ESI has no tax benefit, but the health coverage is worth it.
Final Lesson: Don't Hate the Deductions, Appreciate Them!
Mr.Rao realized:
- ✔ PF is his future safety net.
- ✔ ESI protects him from medical emergencies.
- ✔ Both deductions cost less than private alternatives.
Action Steps for Every Employee:
- Activate UAN (if not done) and link with Aadhaar.
- Check EPF balance yearly—ensure employer deposits correctly.
- Use ESI benefits—find nearest ESI hospital/clinic.
FAQ: EPF & ESI Doubts Cleared
Q1. Can I opt-out of EPF?
No, if your company has 20+ employees, it's mandatory.
Q2. What if I change jobs?
EPF stays with you—transfer via UAN. ESI resets (new employer enrolls you again).
Q3. Is ESI better than private insurance?
For low-cost coverage, yes. But private insurance offers wider hospital choices.
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Now, Adarsh no longer worries about his salary deductions—he sees them as investments in his future. Do you? 💡
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