EPF Interest Rate Calculation

The Employees’ Provident Fund (EPF) is a savings scheme for employees who are working for organisations that come under the Employees’ Provident Fund Organisation (EPFO).

  • Employer and employee make contributions
  • Interest rate is 8.5% p.a.
  • Wage ceiling is Rs.15,000
  • Mandatory for organisations with over 20 employees

For more information, Check out related articles UAN, UAN Activation, EPF Claim Status & EPF Passbook

Methods for the calculation of interest rates

The EPFO decides the rate of interest for the EPF scheme on a yearly basis. The rate of interest is dependent on the market conditions and is vetted by the finance ministry. The interest rate can be calculated either by using the step method or the formula method. The rate of interest for the FY 2020-2021 is 8.5%. Given below is an example of the calculation of interest using both methods:

Assumptions

EPF Basic salary and dearness allowance: Rs.40,000

Rate of interest: 8.5%

Employee’s contribution towards EPF (12% of Rs.40,000): Rs.4,800.

Employer’s contribution towards EPF (3.67% of Rs.40,000): Rs.1,468

Employer’s contribution towards EPS (8.33% of Rs.40,000): Rs.3,332

Employer’s contribution towards EPS under the Rs.15,000 wage ceiling (8.33% of Rs.15,000): Rs.1,249 which is rounded to Rs. 1,250.

The contribution made by the employer towards EPS that is more than the wage ceiling (Rs.3,332-Rs.1,249): Rs.2,082

The excess contribution made by the employer is added to the EPF contribution (Rs.2,082Rs.1,468): Rs. 3,550

Therefore, the total contribution made by the employer and employee towards EPF (Rs.4,800+Rs.3,550) is Rs.8,350.

  • Formula method: Given below is the method to calculate the interest using the formula method:

(8.5%/12) x Rs.8,350= Rs. 59.14 , which is rounded off to Rs.59

  • Step method: Mentioned below is the calculation of interest using the step method:

8.5%/12 = 0.7083% rounded to 0.71%

0.71% x Rs.8,351 = Rs 59.285 , which is rounded off to Rs.58

Therefore, the calculations for the rate of interest are the same using both the methods. Interest can also be calculated with the help of the PF interest calculator that is offered by various third-party websites.

The balance that is available at the end of the year will be the opening balance that is present for the next year.

Example of calculation of interest for a financial year

The table below is an example of the calculation of interest for an entire financial year:

Months Basic salary plus dearness allowance Contribution made by the employer (Rs.) Contribution made by the employee (Rs.) Total balance that is available at the end of the month (Rs.) Interest that is generated (Rs.)
1 40,000 3,550 4,800 8,350 0
2 40,000 3,550 4,800 16,700 59
3 40,000 3,550 4,800 25,050 118
4 40,000 3,550 4,800 33,400 177
5 40,000 3,550 4,800 41,750 237
6 40,000 3,550 4,800 50,100 396
7 40,000 3,550 4,800 58,450 355
8 40,000 3,550 4,800 66,800 414
9 40,000 3,550 4,800 75,150 473
10 40,000 3,550 4,800 83,500 532
11 40,000 3,550 4,800 91,850 591
12 40,000 3,550 4,800 1,00,200 651

Calculation of the total EPF balance that will be present in the account at the end of the year is the addition of the total balance that is present at the end of the last month and the total interest that has been generated. Therefore, the total balance available in the account is:

Rs. 1,00,200 + Rs. 3,903 = Rs. 104,103

Contributions made by employee and employer

It is vital that employees understand the contribution made towards the scheme before finding out the various methods for the calculation of interest. The employees’ contribution can be 8% (in the case of women for the initial three years of employment), 10%, and 12%. The employer’s contribution to the EPF scheme is 10% or 12%. The contribution made by the employer is 10% in case the number of employees working for the organisation is less than 20. However, the employer’s contribution is split among EPF, Employees’ Pension Scheme (EPS), and Employee Deposit Linked Insurance (EDLI).

The break-up of the employee’s and employer’s contribution to the scheme is mentioned below:

Contributions Employer’s contribution Employee’s contribution
EPF 3.67% 12%
EPS 8.33% Nil
EDLI 0.5% Nil
EPF Interest Rate Calculation
EPF Interest Rate Calculation

Salary more than the wage ceiling

In case the salary of the employee is more than Rs.15,000, one of the below-mentioned methods can be opted by employers:

  • The employer may allow the employee to pay 12% of his/her basic salary and dearness allowance and restrict their contribution to the Rs.15,000 wage ceiling.
  • The employer may match the employee’s contribution even if the salary is above Rs.15,000.
  • The employer can restrict both the contributions to the Rs.15,000 wage ceiling.

Information required to use a PF Interest Calculator

An employee should enter the following information in a PF interest calculator to know his/her PF interest:

  • Current age of an employee
  • Current EPF balance
  • Age of retirement
  • Monthly basic pay
  • Monthly dearness allowance
  • Monthly EPF contribution in percentage.
  • Expected salary hike

Once you enter the above-mentioned information in the PF calculator, it will reveal the total interest you would receive at the time of retirement. EPF calculation is, therefore, made easier by EPF calculator.

Tax Benefits on EPF contributions

An employee can get tax benefits for contributing to PF accounts under section 80C of the Indian Income Tax Act, 1961. This benefit can be availed for contributing up to Rs. 1 lakh to a PF account. If you contribute for an employee provident fund account for 5 years, you will escape tax deduction on the amount you have contributed. But, if the duration of your EPF contribution is less than 5 years and you withdraw your PF contribution before it completes 5 years, income tax will be deducted at source (TDS).

News About EPF Interest Rate

  • EPF interest rates (2020-21) to be announced on Thursday

    The Employees’ Provident Fund Organisation may announce the interest rate on provident fund deposits for 2020-21 this Thursday when the central board of trustees have their meet at Srinagar.

    There were a lot of speculations that the retirement body will lower the interest rates on provident funds for 2020-21 after the economic downturn in 2020.

    Last year, in March, the EPFO had reduced interest rate on provident funds to a seven-year low of 8.5%. The board had said it will pay 8.5% interest to the subscribers for the year ended 31 March in two installments.

    03 Mar 2021

  • Union Budget 2021 proposes to levy income tax on PF interest

    In the Union Budget 2021, a proposal has been put forward to start levying income tax on the interest earned on Provident Fund contributions by the employee if it exceeds Rs.2.5 lakh per annum, effective 1 April 2021. This is meant to rationalise income tax exemptions on income earned by employees earning a very high-income.

    09 Feb 2021

  • EPFO offers an interest rate of 8.5% per annum

    The Employees’ Provident Fund Organisation has decided the interest rate for FY19-20 which will be 8.5% per annum on the provident fund. The EPFO will be offering 8.15% per annum and 0.35% will be offered in December.

    EPFO had confirmed earlier that it had settled claims worth Rs.94.41 lakh since 1 April 2020. COVID advance amounted for 75% and 79% illness claims were settled for the subscribers of the PF scheme. The EPFO has also settled 32% more claims compared to April-August 2019).

    The Ministry of Labour and Employment stated that the organisation sped up the settlements of COVID advances and other illness-related claims to ensure that their members can sustain themselves during the pandemic.

    11 Sept 2020

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