Home >Money >Personal Finance >Know how EPF interest is calculated

NEW DELHI: The Centre in December announced it will credit the interest for FY19-20 into the accounts of members of the Employee’s Provident Fund Organisation (EPFO) members. The government had fixed an interest of 8.5% for FY2019-20.

Let us understand how this interest is decided and calculated.

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The rate of interest is decided by the Central Board of trustee (CBT), the apex decision making body of the EPFO. The CBT comprises representatives of employers, employees, and the government. The interest rate decided by CBT is sent to the finance ministry for approval. After the approval from finance ministry, interest is credited to the accounts of the EPFO members.

Most salaried employees contribute around 12% of their salary--basic plus dearness allowance--to their provident fund accounts every month. A matching contribution is made by the employer every month. Of the employer’s contribution, 8.33% goes towards the Employees Pension Scheme (EPS) and the rest goes to the employees provident fund account. The contribution to EPS is limited to 8.33% of 15,000 which comes to 1,250. Anything in excess of that goes to the EPF account. Also, those who joined EPFO after September 2014, it is not mandatory to contribute towards EPS. In such cases, the entire contribution of the employer goes to the EPF account.

Let's understand the calculation now.

For a person who is earning a basic salary plus allowance of around 20,000, the contribution towards EPF will be 2,400. The employer's contribution will also be 2,400 if you became a member of EPFO after September 2014.

Assuming, you became a member of EPFO before September 2014, your employer’s contribution towards EPF will be equal to ( 2,400) - 8.33% of 15,000 (Rs1,250) = Rs1,150.

Therefore, your total inflow into the account will be your contribution of 2,400 and the employer's 1,150, which comes 3,550 every month.

Assuming an annual interest rate of 8.5%, the monthly rate of interest will be 0.7083%.

If contributions started in April, the 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 will be 7,100*0.7083% = 50.

The same process is followed for interest calculation for the remaining months 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.

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