How EPF interest is calculated for 2021?
What is EPF?
The EPF is a pension benefit plan, provided for in the Workers Provident Fund and Miscellaneous Act of 1952, where an employee has to pay a contribution to the scheme and the employer also has to pay an equivalent contribution per month on the basis of one month.
The system is managed by the Agency of the Employee Provident Fund (EPFO). The employee receives a lump sum, including self-employment and employer contribution, and interest on both pension and work periods (under certain circumstances as stipulated). The principal sum and EPF interest earned are excluded from income tax after withdrawal and are also an attractive pension scheme for the wage class.
The Scheme includes all organizations employing twenty or more employees and including certain entities subject to certain conditions and exemptions even if the 20 workers requirements required are not fulfilled.
Present and historic EPF rates
The EPF interest rate is reviewed every year following consultation with the EPFO Central Board of Trustees’ Ministry of Finance. The EPF interest rate for FY 2019-20 was lowered to 8.5%, 0.15% lower than last year’s interest rate. For the last five years, the interest rates of the fund are listed below:
|Year||EPF Interest Rates|
EPF Employee and Employer Contribution
There are two aspects of the donation, namely the employee and employer contribution, depending on the individual contributing to the EPF. The employee contributes 12% of the basic wage plus the “DA” to his EPF account. In cases where the organization has less than 20 workers, and in some specified industries like Jute, Beedi, Tile, etc., the employee must contribute 10% to the lower contribution.
The employer pays a comparable amount (12% of basic salary plus DA) to the system. 8.33 percent of the employer contribution is paid to the EPS, subject to a cap of 1250 per month where the employee’s pay is 15 000 or higher and the remaining 3.67% is added to the employee’s EPF account. The employer also contributes 0.50 percent to the employee’s Related Insurance (EDLI) savings account.
The employee is also entitled to voluntarily contribute more than 12% of the statutory requirement and is referred to as a donation to the Voluntary Provider Fund (“VPF”), which shall be accounted for separately. The VPF also offers tax-free interest, but the employer is not obligated to make VPF contributions if the employee wishes to do so.
How to Calculate Interest on EPF
Every month pf interest rate is calculated but is deposited in the account at the end of the financial year. The interest calculation on the EPF of the employee is explained by the given example.
Basic Salary + Dearness Allowance = ₹ 30,000
Employee’s contribution towards EPF = 12% of ₹ 30,000 = ₹ 3,600
Employer’s contribution towards EPS (subject to limit of 1,250) = ₹ 1,250
Employer’s contribution towards EPF = (₹ 3,600 – ₹ 1,250) = ₹ 2,350
Total EPF contribution every month = ₹ 3,600 + ₹ 2350 = ₹ 5,950
The employee provident fund interest rate for FY 2019-2020 is 8.50%.the interest applicable per month When calculating interest, is = 8.50%/12 = 0.007083%. Again to remind, the provident fund interest will be calculated at the end of every month however the interest amount will only be credited at the end of the financial year.
Assuming the employee joined service on 1 April 2019, contributions start for the financial year 2019 – 2020 from April 2019 only.
Total EPF Contribution for April = ₹ 5,950
For April Interest on the EPF contribution= Nil (No interest for the first month)
EPF account balance at the end of April = ₹ 5,950
EPF Contribution for May = ₹ 5,950
Total EPF account balance as at May = ₹ 11,900
Interest on the EPF contribution for May = ₹ 11,900 * 0.007083% = ₹ 84.29