In December 2020, the central government had announced to send interest on EPF to the accounts of the members of the Employees Provident Fund for the financial year 2019-20. The government has fixed the interest on EPF at 8.5% for 2019-20. So let’s know how the interest on EPF is decided and how it is calculated …
The EPF interest rate is decided by the Central Board of Trustees, the top decision-making body of the EPFO. The CBT consists of employers, employees and government representatives. The interest rate fixed by the CBT is sent to the Finance Ministry for approval. After approval from the Ministry of Finance, the interest is credited to the accounts of EPFO members. Most salaried employees contribute around 12% of their basic salary plus dearness allowance to their provident fund accounts every month and so does the employer. 8.33% of this employer’s contribution goes to the Employees Pension Scheme (EPS) and the rest goes to the Employees Provident Fund account.
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Contribution to EPS is limited to 8.33% of 15,000, which comes to around Rs 1,250. Any amount in excess of this goes to the EPF account. Also, for employees who joined EPFO after September 2014, it is not mandatory for them to contribute for EPS. In such cases the entire contribution of the employer goes to the EPF account.
Now let’s understand the calculation of interest
If a person, who is getting around Rs. 20,000 as basic salary and allowance, his contribution to EPF will be Rs. 2,400. Employer contribution will also be Rs 2,400 on becoming a member of EPFO after September 2014.
If we assume that you have become a member of EPFO before September 2014, your employer’s contribution to EPF will be 8.33% of Rs 2,400 – 15,000 ie Rs 1,250 = Rs 1,150. So your contribution to your EPF account will be Rs 2,400 and Rs 1,150 from the employer, which comes to 3,550 every month. If calculated on this amount at the rate of 8.5 percent annual interest, then the interest of 0.7083% per month. If contribution starts in April, the total EPF contribution for the month would be Rs 3,550.
The thing to note is that you will not receive any interest for April, as the salary is credited at the end of the month. So your EPF account balance at the end of the month will be Rs 3,550. For May, your employer and you will contribute 3,550 to the EPF account, raising the balance to Rs 7,100. That is, the interest on EPF contribution for May will be 7,100 * 0.7083% = Rs 50.
The same procedure is followed to calculate the interest for the remaining months and the interest earned is credited to your EPFO account at the end of the financial year. This happens when the Finance Ministry notifies the rate of interest proposed by the Central Board of Trustees.
