How to calculate interest on your EPF balance

In March, the Central Board of Trustees lowered the interest rate on Employees' Provident Fund (EPF) to 8.5% for 2019-20, the lowest in seven years. However, the finance ministry is yet to notify the same.

Millions of salaried employees and their employers contribute to the EPF every month, which is a retirement benefit scheme. An employee contributes 12% of their salary and a similar contribution is made by the employer. Out of the employer's contribution, 8.33% goes towards Employees’ Pension Scheme (EPS) and the rest goes to employee’s PF account. “However, for the purpose of calculation of EPS, wages is limited to ₹15,000 per month i.e. contribution towards EPS is limited to ₹1,250 per month. Where the PF wages is more than ₹15,000 per month, anything in excess of ₹1,250 will be part of employer's contribution to PF account,” said Saraswathi Kasturirangan, partner at Deloitte India.

“Also, for new members of EPFO from September 2014, contribution to EPS is not required if the PF wages exceeds ₹15,000 per month. For such employees, the entire 12% of employer contribution is credited to the PF account,” she added.

Note that the EPF interest is calculated every month but is deposited in an employee’s account only at the end of a financial year. EPF contributions offer a higher interest rate than fixed income retirement solutions with sovereign guarantee like PPF.

“The liquidity of EPF is higher than PPF. Knowledge of these facts along with the interest rate calculation method would allow salaried individuals to make an informed decision while choosing between Voluntary Provident Fund (VPF) and other fixed income retirement solutions like PPF. VPF is an extension of one’s EPF account where the EPF subscriber can voluntarily contribute over and above his mandatory EPF contribution. The product features of VPF along with its interest rate are the same as the EPF," said Naveen Kukreja, chief executive officer (CEO) and co-founder, Paisabazaar.com, an online financial services marketplace. Read on to know how the interest on your EPF balance is calculated.

METHOD FOR CALCULATION

If the total of your basic salary and allowances is ₹20,000, your contribution towards EPF would be ₹2,400. Your employer contribution towards EPF will be ₹2,400 if you became a member of EPFO after September 2014.

In our example, we are assuming you became a member of EPFO before September 2014. So, your employer’s contribution towards EPF will be equal to Employer's contribution ( ₹2,400) - 8.33% of ₹15,000 ( ₹1,250) = ₹1,150.

Therefore, your total contribution to the EPF would be your contribution of ₹2,400 and employer's contribution of ₹1,150, which will be equal to ₹3,550 every month.

Assuming the interest rate for 2019-2020 is 8.5%, while calculating interest applicable for each month you’ll have to divide 8.50% by 12.

Therefore, 8.50%/12 = 0.7083% will be your monthly rate of interest.

If contributions start from April, your total EPF contribution for the month would be ₹3,550.

Note that you will not earn any interest for April (because salary is credited at the end of the month), so your EPF account balance at the end of the month would be ₹3,550. For May, your employer and you would’ve contributed another ₹3,550 to the EPF account, which would increase the balance to ₹7,100.

Interest on the EPF contribution for May = ₹7,100*0.7083% = ₹50. The same process is followed for interest calculation for the remaining months (refer table) and the total interest earned is deposited at the end of the financial year in your EPFO account, after the finance ministry notifies the rate of interest proposed by the central board of trustees.