EPF Interest Rate Calculation

About EPF Interest Rate

Have you ever wanted to calculate the interest or balance on your Employees’ Provident Fund (EPF) scheme? If you are worried that it might be too complex, you do not have to worry. You only need to understand the contributions made by you as an employee and your employer. Before we discuss the method to compute the interest and balance on your EPF scheme, let us understand some of the main aspects of an EPF scheme.

At present, the EPF Interest Rate is 8.65% applicable on EPF contributions made by the employer and the employee. The calculation of the actual interest received depends upon the salary of employee and also on the break-up of employer’s PF contribution. In order to calculate the rate of interest on EPF, let us first look into the EPF contribution structure for better understanding of EPF.

Breakup of EPF Contribution

• 12% of the employee’s salary goes towards the EPF.
• Whereas the employer’s contribution is divided as below:

1. 3.67% goes towards contribution for EPF
2. 8.33% goes towards contribution for EPS
3. 0.5% goes towards contribution for EDLI
4. 1.1% goes towards contribution for EPF administration charges
5. 0.01% goes towards contribution for EDLI administration charges

Therefore, the employer contribution is 13.61%. The premium and management charges are borne by the employer and the maximum limit is set at 0.5% of Rs.15,000.

The EPF contribution can be offered at 10% rate, if:

• Any establishment that has less than 20 employees.
• Any sick unit that has been declared as sick by the Board for Industrial and Financial Reconstruction.
• Any establishment that has accumulated losses equal to or exceeding its net worth.
• Establishments in jute industry, beedi industry, coir industry and Guar gum factory.

Contribution to EPF by Women Employees

As per the Union Budget 2018, in order to encourage more women to start working in the private sector, the contribution towards EPF has been decreased to 8% for the first three years. However, the employer’s contribution towards EPF remains the same. Earlier, depending on the organisation, the contribution made by women employees were either 10% (for organisations with less than 20 employees) or 12%.  

EPF contribution for new Employees covered by the EPFO

If you are a new employee who will be covered by the EPFO, then your employer will not make any contribution. Instead, the government will make this contribution, which will be 10% or 12%. This will be paid for the initial 3 years of the person’s employment and it will include both EPS and EPF. The payment will be made even to the existing beneficiaries whose 3 years haven’t exhausted. It has been declared that the government will make this contribution exclusively for new employees who are registered until 31 March 2019.

Example of EPF Calculation for an Employee

Let us take an example of Amit who has just joined a new organization in the month of June, at a monthly salary of Rs.10,000 (Basic + DA). Let us depict with the help of a table, his monthly deductions and the applicable rate of interest.

So, in the example illustrated above, the total interest that Amit received for his EPF contributions from June to February comes out to be Rs.410.03.

Note the points while Calculating the EPF Interest

There are a few points that need to be taken into account while calculating the rate of interest on EPFcontribution. These are listed below.

• EPF contributions are shown by the employer with respect to the salary due. For example, salary for the month of August will be paid in September and the EPF contribution for August will be shown in September and not in August.
• The interest amount received on EPF is rounded off to the nearest decimal before being credited into your EPF account.
• In the unfortunate event of death of employee, the interest is payable till the month preceding the month in which death occurred.

How to Calculate Interest of EPF Scheme? 

It is vital to understand the contributions that are being made to an individual’s Employee Provident Fund (EPF) account before calculating the interest. The employee and employer each contribute a certain percentage of the employee’s basic salary towards EPF. The employee contributes either 10% (if there are less than 20 employees working under the organisation), 12%, or 8% (in case of women employees) towards EPF. 

The employer contributes 12% of the employee’s basic salary towards EPF. Out of the 12%, 8.33% goes towards Employee Pension Scheme (EPS) and the remaining 3.67% is towards EPF. Therefore, in total an employee earns either 13.67%, 15.67%, or 11.67% towards EPF. In 2018, the rate of interest on EPF contributions made by the employee and employer is 8.55%.  

EPF Interest Rate

In a move that would benefit 60 million subscribers, the Employees Provident Fund Organisation (EPFO) has increased the Employees Provident Fund (EPF) interest rate from 8.55% to 8.65% for 2018-2019. The decision sees a 10-basis point increase from the interest rate for 2017-2018.

The interest rate is lesser than the 8.8% for 2015-2016, but the same as it was for 2016-2017. The increase is seen as a sop for salaried employees as it is an election year. Due to an increase in interest rates, the EPFO will only have a surplus of Rs.151 crore. For 2017-2018, the EPFO had a surplus of Rs.586 crore. The increase in interest rates makes EPF as one of the most beneficial savings schemes. However, the hike in interest rates needs approval from the finance ministry.

The Finance Ministry has been in discussion with the Labor Ministry to reduce the interest rate on PF deposits. Earlier, the EPFO has been providing 8.65% interest rate on EPF deposits. The Finance Ministry wanted to bring down the rates due to the depleting yield of government securities and alternative savings instruments.But for the financial year 2017-2018, the EPF interest rate is 8.55%.

The latest EPF interest rate stands at 8.8% p.a. (2015 - 2016). Interest rate for EPF deposits for the year 2017 - 2018 is 8.65%

• Balances held in the EPF account earn interest. Such interest earned is entirely tax-free. Interest is calculated and credited to the account based on a set rate of interest.
• As with many other state-run savings schemes, EPF interest rates are decided every year by the Indian government in conjunction with the Central Board of Trustees (CBT) who administer the Act in association with the EPFO. The rate announced is applicable for the year it is announced.
• The year for which EPF interest rates are applicable refers to a financial year i.e. April 1st of one year to March 31st of the following year. For e.g. for the period 2014 - 2015, the interest rate of 8.75% is applicable on EPF deposits from April 1st 2014 to March 31st 2015.
• Interest is calculated based on monthly running balances but credited on an annual basis, at the end of the year i.e. March 31st. Interest so credited is then added to the following month’s balance i.e. it is included in April’s balance for interest calculation.
• If an EPF account is deemed inoperative, interest will no longer be credited to it.
• Interest is not payable on withdrawn amounts.
• Interest is not payable on the amounts directed towards EPS by the employer.

After a discussion with the Ministry of Finance, the Employees’ Provident Fund Organisation (EPFO) decides the Employees Provident Fund (EPF) rate of interest at the end of every financial year. The employer and employee each contribute 12% of the employee’s salary towards EPF. While the entire contribution of the employee goes towards EPF, only 3.67% of the employer’s contribution goes towards EPF. The remaining 8.33% goes towards pension. The EPF interest rates have been fluctuating since 1952. 

Below is a table of EPF interest rate from 1952 to 2018: 

Calculation of EPF Withdrawal

Calculation of the EPF amount involves the following steps:

1. Identify your EPF contribution - This amount usually appears on your payslip as ‘PF deduction’. It will be either 12% of (Basic Salary + Dearness Allowance, if applicable) or 12% of Rs.15,000 i.e., Rs.1,800.
2. Identify your employer’s contribution - This amount is usually stated in the offer letter; however, if you fail to identify it you may ask your employer. It will either be 12% of (Basic Salary + Dearness Allowance, if applicable) or 12% of Rs.15,000, i.e., Rs.1,800.
3. Understand the component of EPS - Out of the 12% contributed towards EPF by the employer, 8.33% goes towards the Employee Pension Scheme, subject to the EPS contribution having a maximum cap of Rs.1,250. Hence, the actual contribution towards the EPF from the employer is 3.67%. So for calculation purpose:
   1. If your employer contributes 12% of Rs.15,000 = Rs.1,800, the EPF portion will be 3.67% of Rs.15,000 = Rs.550.
   2. If your employer contributes 12% of (Basic Salary + Dearness Allowance, if applicable), subject to EPS having a maximum cap of Rs.1,250, the actual amount that goes to the EPF is [12% of (Basic Salary + Dearness Allowance, if applicable)] - Rs.1,250.
4. Observe the interest calculation - The simple interest on EPS is calculated on the basis of monthly contributions. This amount is further rounded off to the nearest rupee, and subsequently compounded annually.

Let us analyze this with an example. Consider a scenario where your contribution towards EPF and your employer’s contribution are Rs.1,800 each. Out of the employer’s contribution, only Rs.550 goes towards EPF, while the remaining Rs.1,250 goes towards EPS. If you had joined the company in November, your contribution for the first 5 months would be calculated as shown below:

This implies that your contribution for the entire financial year is Rs.7,200. At the end of the financial year, the final interest will be added to your contribution, and the interest calculation for the next year proceeds as in the table above.

Similarly, the employer’s contribution is as shown below:

This implies that your employer’s contribution for the entire financial year is Rs.2,200. At the end of the financial year, the final interest will be added to the employer’s contribution, and the interest calculation for the subsequent year proceeds as in the table above.

If you have updated the withdrawal option in Form 10C, a part of the EPS would be given back to you. Listed below are some facts on the same:

• The EPS portion of the employer’s contribution will not earn any interest, as indicated above.
• When you withdraw the EPS, you will not receive the full EPS amount. The sum that you receive depends on your service period, and is not dependent on the actual balance in the EPS corpus. The withdrawal amount will be calculated according to the table below:

• A fraction of service that spans 6 months or more is considered as 1 year, and service less than 6 months is ignored.

So, if you have completed 1 year and 5 months in your previous organization, the years of service considered for EPS calculation will be 1 year. Even if your monthly salary was a large amount, for the purpose of EPS calculation, this amount can be considered as Rs.1,250 per month (or Rs.15,000 annually). So, the EPS amount that you will receive is, 1.02 * 15,000 = Rs. 15,300.

• A fraction of service that spans 6 months or more is considered as 1 year, and service less than 6 months is ignored.

So, if you have completed 1 year and 5 months in your previous organisation, the years of service considered for EPS calculation will be 1 year. Even if your monthly salary was a large amount, for the purpose of EPS calculation, this amount can be considered as Rs.1,250 per month (or Rs.15,000 annually). So, the EPS amount that you will receive is, 1.02 * 15,000 = Rs. 15,300.