Everything you Need to Know about the Calculation of PF Interest Rate

The employees' provident fund organisation symbolises India’s largest fund, which is applicable to retired employees. The rules of the Employees Provident Fund Organisation apply to every organisation which employs more than 20 individuals. The details of this article will help you understand how pf interest is calculated. As per the regulations of the Fund, 12% of a salaried employee’s basic pay along with dearness allowance is considered the employee’s contribution. The employer makes a similar 12% contribution. A sum of this collective amount of 24% is made towards the 1995 employees’ pension scheme.

Also Read: PF Calculator - Calculate EPF Online

When employees retire, they are entitled to the said amount, accumulating in the fund over the active years of their employment. It is important to note that only 3.67% of the employer’s 12% contribution is channelled towards the employee’s EPF account. The remaining 8.33% is channelled to the employee pension scheme account. An employee has the liberty to make an increased amount of contribution. Infact, employees can contribute their entire salary towards the provident fund. However, this similar amount is not binding on employers. Currently, the interest rate for EPF is 8.1%.

Did you know?

If you switch jobs, you are not allowed to withdraw the cumulative EPF sum of money, and if you do, it is considered an illegal act.

The Different Methods Used for PF Interest Calculation 

The step and formula methods are used to calculate the interest rates. Details of these methods are as follows:

Step:

• At the start, the opening balance is always zero, making the accrued interest zero.
• In the second month, the opening balance is, e.g. ₹10.750.
• Let us assume that the rate of interest per annum is 8.1%.
• Your monthly interest is calculated as - 8.1%/12=0.00675
• Monthly interest = 0,00675*10,750= ₹72.56 or ₹73 after rounding it.

Formula:

• Balance in the EPF account = ₹10,750
• Rate of interest applicable = 8.1%
• Formula method-(8.1% / 12)*10, 750 = ₹72.56 or ₹73.
• It is important to understand that the closing balance of a financial year becomes the opening balance for the following new financial year. The amount, therefore, will include the previous balance accumulated at the end of the last 12 months and the total sum of interest which has been accumulated on that sum in that year.

Example of Calculation of Interest for a Financial Year

• An employee’s salary – ₹50,000
• Interest rate -  8.1%
• Contribution made by an employee to the EPF account -  (12% of emp. salary, i.e. ₹50,000) = ₹6000
• Contribution made by an employer towards EPF account ( 3.67% of emp. salary, i.e. ₹50,000) = ₹1835
• Contribution of the employer towards Employee pension scheme – 8.33% of emp. salary, i.e. ₹50,000) = ₹4165
• Contribution of the employer towards EPS under the wage ceiling amount of ₹15000 = 15000 * 8.33% = ₹1249 or after rounding = ₹1250
• Employer contribution to EPS is more than the wage ceiling, i.e. (₹4165 – ₹1250) = ₹2915
• Employer has contributed in excess, and this is therefore added to the contribution towards EPF, i.e., ₹2915+ ₹1835. This totals to – ₹4750
• The total amount of contribution by both, employee as well as employer = ₹ 6000+₹4750 = ₹10750
• Formula calculation = 10750x8.55% / 12= ₹76.59

Contributions Made by Employee and Employer

The contributions made by male employees, female employees and employers vary. Given below are the details of the same:

• EPF contribution made by male employees = 12% of the basic salary + dearness allowance. Out of this 8.33% goes towards the employees' pension scheme
• EPF contribution made by female employees = In the past, it was 12%. This has now been reduced to 8%. This is applicable to all new female employees for the first three years of their employment with a company.
• If an organisation has less than 20 salaried employees – Employer is liable to make a contribution of 10%
• If ‘sick units’ are included as a part of an organisation - Employer is liable to make a contribution of 10%

What Happens when the Salary is More than the Wage Ceiling?

• If the employee’s salary exceeds a sum of ₹15000 – The employer has the liberty to make contributions in the following manner:
• Employers can choose to allow employees to contribute 12% of their salaries along with the dearness allowance, thereby restricting employees’ contributions to the wage ceiling of ₹15000
• Employers can make a similar sum of contribution as the employees despite the salary being more than the wage ceiling of ₹15000.
• Employers can make bring about a restriction on their as well as their employees’ contributions to the wage ceiling of ₹15000

Also Read: How To Transfer PF Funds To Another PF Account Easily

Information Required to Use a PF Interest Calculator

Employees keen to understand the amount of accumulated interest in their PF accounts have to follow the following instructions to be able to use the said calculator:

• Details of employee’s age
• Amount in the EPF account (on that said date)
• Retirement age
• Basic salary drawn every month
• Dearness allowance of the employee (monthly amount)
• EPF contribution made every month (Percentage amount)
• Anticipated increase in salary

Tax Benefits on EPF Contributions

Employees who contribute towards provident fund savings benefit from various taxation schemes. Some of these include the following:

Employees who make a contribution of ₹1 lakh can benefit under section 80C (1961 Income Tax Act of India). If employees contribute on a consistent basis for at least 5 years, they can benefit from tax deductions on the cumulative amount. However, if employees, for some reason, withdraw before a time frame of 5 years, they are liable to pay income tax.  

Conclusion

Making a contribution towards a provident fund always reaps benefits for employees even if the lock-in period is five years. This article gives clarity on the contribution percentage made by employers and employees and how the final amount is arrived upon.

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