Provident Fund Calculator

A provident fund is a retirement savings pool. Every month a fixed percentage of your basic salary is deducted and paid in, your employer adds its share, and the fund credits profit on the whole balance. The calculator runs this month by month, adds your increment every twelve months, and keeps three running totals so you can see how much of the final balance is your own money, your employer's money and profit.

Real funds credit profit once a year on the average balance, so actual results can differ a little. The pattern is the same: the employer share is free money that also compounds, and the profit share grows fastest in the last decade.

With a Rs 100,000 basic salary, 10% from you and 10% from your employer, a 10% yearly increment and a 10% profit rate, the fund reaches Rs 61,760,467 after 25 years. You contribute Rs 11,801,647, your employer Rs 11,801,647, and profit adds Rs 38,157,172, which is 62% of the balance. If your salary stayed flat the same plan reaches Rs 24,666,498.

The profit rate is the biggest single lever, which is why it is worth asking your trustees what the fund has credited over the last few years and where it invests.

Your employer's share is the other reason a provident fund beats saving the same money alone: in this example it adds Rs 11,801,647 on top of your Rs 11,801,647, a 100% return on your own contributions before any profit. Under rule 2(d) of the recognition rules, the employer can recover only its own contributions and the profit on them, and only if you are dismissed for misconduct or leave voluntarily early; your own contributions stay yours. Check your fund's rules before you resign.

Part I of the Sixth Schedule to the Income Tax Ordinance, 2001 sets the rules for a recognised provident fund. As read in the summaries we could access:

• Employer contributions: anything above the lower of one-tenth of salary or Rs 150,000 a year is treated as the employee's income (rule 3(a)). The one-tenth limit is the one that bites for most people, while the rupee cap bites when basic salary is above Rs 125,000 a month. At Rs 250,000 a month, Rs 150,000 of a 10% employer share is above the limit.
• Employer match: the employer's contribution in a year may not exceed the employee's (rule 2(c)).
• Profit: interest credited above one-third of salary, or above a rate the Federal Government notifies, is treated as income (rule 3(b)). We could not confirm the current notified rate, so ask your trustees.
• Payout: the accumulated balance is excluded from total income (rule 4), and rules 5 and 6 cover tax deducted at source on some payouts.

If your employer excess is taxable, the income tax calculator shows what it costs at your slab. For the voluntary side of retirement saving, with its own yearly tax credit, see the VPS pension calculator.

• Take the full match. If your fund lets you choose a higher percentage, the employer match is the best return you will get, but check the limit above for high salaries.
• Watch the trustees' investments. A fund held mostly in government securities tracks interest rates, so profit falls when the State Bank cuts. Compare the credited profit with inflation, not only with a bank account.
• Do not cash out when you change jobs. The balance can usually be transferred to your next employer's recognised fund, which keeps it compounding and keeps it excluded from income under rule 4.
• Plan for the gap. A fund plus gratuity rarely covers a full retirement. Put the balance into the lump sum box of the retirement calculator to see what you still need.