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How Is EPF Balance And Interest On It Calculated?

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Salaried employees and their employers are required to contribute to the EPF (Employees' Provident Fund) every month, which forms a part of their retirement benefit. However, many may not be fully aware of how interest is calculated on their EPF balance and how their contributions are distributed.

How Is EPF Balance And Interest On It Calculated?
 

Basics of EPF contribution

  • An employee is required to contribute 12% of Basic Pay + DA (Dearness Allowance) components of their salary to their EPF account.
  • An employer also make an equal contribution, however, out of the 12%:
    • 3.67% goes towards the employee's EPF account
    • 8.33% to Employees' Pension Scheme (EPS)
    • 0.50% to Employees' Deposit-linked Insurance Scheme
    • 0.50% to administrative charges
  • For the calculation of EPS, wages are limited to Rs 15,000 per month and contribution towards EPS is limited to Rs 1,250 per month. However, an employer can voluntarily contribute higher wages.
  • In the cases of establishments with less than 20 employees, sick units or units that meet certain conditions, the contribution could be less at 10%.
  • In Budget 2018, to incentivise women employment in the organised sector, the government had introduced a reduction in employees' part of the contribution to 8% for the first three years of their employment. The employer will, however, continue to make 10 or 12% contribution from the first year itself.
  • Contribution towards: Employee Employer
    EPF 12% or 10% or 8% 12% or 10%
    EPS 0% 8.33%
    EDLI 0% 0.50%

    How to calculate EPF account balance?

    Example: employee basic + DA = Rs 20,000

    A) Employee's share:

    12% of basic + DA = Rs 2,400

    B) Employer's share:

    For the employer's share, when the current income exceeds the wage ceiling of Rs 15,000, the employer is free to choose from three standard methods to calculate the contribution amount and is free to use any one of the methods.

    Calculation methods 1 2 3
    Employee contribution 12% of Basic Pay + DA 12% of Basic Pay + DA 12% of Rs 15,000
    Employer contribution 12% of Basic Pay - 8.33% of Rs 15,000 3.67% of Rs 15,000 3.67% of Rs 15,000

    Calculation

    • 3.67% of Rs 20,000 = Rs 734
    • 8.33% of Rs 20,000 = Rs 1,666 towards EPS. EPS contribution in excess of EPS threshold (8.33% of Rs 15,000)= 1,666- 1249.50= Rs 416.5

    Total Employer's contribution towards EPF = 734 + 416.5 = Rs 1,150.5 = Rs 1,150 (rounded off as per EPPFO rules)

     

    Basics of EPF interest calculation

    • Interest on EPF balance is calculated every month but is only deposited to an employee's account at the end of a financial year.
    • Interest is calculated on the opening balance of each month.
    • Since opening balance in the first month of employment will be zero, interest calculation begins from the second month.
    • For the first month of the second year, interest is calculated based on the opening balance for the new year, which will include interest and closing balance of the previous year.

    How is interest on EPF balance calculated?

    Based on the calculation above and assuming the EPF account is that of a new joiner in the financial year 2019-20, for which interest had been declared at 8.50 percent per annum.

    Month Employee contribution (A) in Rs Employer contribution (B) in Rs A+B (in Rs) Balance at the end of the month (Rs) Interest accrued (Rs)
    1 2,400 1,150 3,550 3,550 0.00
    2 2,400 1,150 3,550 7,100 25.15
    3 2,400 1,150 3,550 10,650 50.29
    4 2,400 1,150 3,550 14,200 75.44
    5 2,400 1,150 3,550 17,750 100.58
    6 2,400 1,150 3,550 21,300 125.73
    7 2,400 1,150 3,550 24,850 150.88
    8 2,400 1,150 3,550 28,400 176.02
    9 2,400 1,150 3,550 31,950 201.17
    10 2,400 1,150 3,550 35,500 226.31
    11 2,400 1,150 3,550 39,050 251.46
    12 2,400 1,150 3,550 42,600 276.60
    Totals 28,800 13,800 42,600 - 1,660

    Balance at the end of the year and opening of the second year will be Rs 42,600 + 1,660 = Rs 44,260

Read more about: epf pf employees provident fund
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