Procedure to Calculate EPF Interest Rate
It is mandatory for working professionals who are earning a basic salary of Rs.15,000 or less to contribute towards the Employees Provident Fund (EPF) scheme. 12% of the employee’s basic salary and Dearness Allowance (DA) is contributed by the employee and employer each. In case the employee earns less than or equal to Rs.15,000, the employer’s contribution towards EPF is 12%. However, in case the employee earns more than Rs.15,000, the employer’s contribution towards EPF can vary. In case the total number of employees working in the organisation is less than 20, the contribution made by the employer is 10%.
Breakup of the contribution made by employer and employee
The breakup of the contribution made by the employer and employee is given in the table below:
| Type of scheme | Employee’s contribution (%) | Employer’s contribution (%) |
| Employees Provident Fund (EPF) | 12/10/8* | 3.67/1.67 |
| Employees’ Pension Fund (EPS) | Nil | 8.33 |
| Employee Deposit Linked Insurance (EDLI) | Nil | 0.50 |
Bankbazaar provides the information about the 8% contribution towards EPF is for women employees in their first 3 years of employment.
What is the wage ceiling for the contribution of Employees Provident Fund?
In case an employee’s salary exceeds Rs.15,000, the three different methods that the employer chooses to make the contributions are mentioned below:
| Method | Contribution of the employee | Contribution of the employer |
| 1 | 12% of dearness allowance and basic salary | 12% of the basic salary minus 8.33% of Rs.15,000 |
| 2 | 12% of dearness allowance and basic salary | 3.67% of the wage ceiling of Rs.15,000 |
| 3 | 12% of the wage ceiling of Rs.15,000 | 3.67% of the wage ceiling of Rs.15,000 |
Calculation of the rate of interest for Employees Provident Fund
The rate of interest for the EPF is decided by the Employees Provident Fund Organisation (EPFO). Currently, the rate of interest is 8.65% for the FY 2018-2019. The rate of interest has increased from 8.55% for the financial year 2017-2018.
An example of understanding the contributions made towards EPF by the employee and employer is mentioned below: The dearness allowance and basic pay of the employee: Rs.60,000
- The dearness allowance and basic pay of the employee: Rs.60,000
- The contribution made by the employee towards EPF (Rs.60,000 x 12%): Rs.7,200
- The contribution made by the employer towards EPF (Rs.60,000 x 3.67%): Rs.2,202
- The contribution made by the employer towards EPS (Rs.60,000 x 8.33%): Rs.4,998
- Contribution made by the employer on the Rs.15,000 threshold income (Rs.15,000 x 8.33%): Rs.1,249.50
- The extra contribution that is made by the employer towards EPS (Rs.4,998-Rs.Rs.1,249.50): Rs.3,748.50
- The extra contribution is added to the employer’s EPF contribution (Rs.3,748.50 + Rs.2,202): Rs.5,950.50
Therefore, the final contribution that the employer makes towards EPF is Rs.5,950.50, which is rounded off to Rs.5,951 as per stipulations made by the EPFO.
Hence, the total contribution that the employee and employer make towards EPF is Rs.13,151. This figure will also be the account’s opening balance.
The two different methods where EPF calculation can be done is mentioned below:
- Formula method: The interest for the first month will be zero, therefore, the account’s opening balance will be zero. Calculation of interest takes place only from the second month. Given below is the procedure to calculate interest using the formula method for an amount of Rs.13,151 at the rate of interest of Rs.8.65%:
13,151 x (8.65%/12) = Rs.94.79
The interest generated is Rs.94.79 which is rounded off to Rs.95.
- Step method: The procedure for the calculation of interest using the step method is mentioned below:
- Monthly rate of interest will be 8.65%/12: 0.72%
- Interest generate will be 0.72% x 13,151 = 94.68, which is rounded off to Rs.95.
Therefore, the interest generated using both methods are the same.
Given below is the table where interest is calculated on a monthly basis for the entire year:
| Month | Basic salary plus DA (Rs.) | Contribution made by the employer towards EPF (Rs.) | Contribution made by the employee towards EPF (Rs.) | Balance present in the account at the end of the month (Rs.) | Interest that is generated (Rs.) |
| 1 | 60,000 | 5,951 | 7,200 | 13,151 | 0 |
| 2 | 60,000 | 5,951 | 7,200 | 26,302 | 95 |
| 3 | 60,000 | 5,951 | 7,200 | 39,453 | 189 |
| 4 | 60,000 | 5,951 | 7,200 | 52,604 | 284 |
| 5 | 60,000 | 5,951 | 7,200 | 65,755 | 379 |
| 6 | 60,000 | 5,951 | 7,200 | 78,906 | 473 |
| 7 | 60,000 | 5,951 | 7,200 | 92,057 | 568 |
| 8 | 60,000 | 5,951 | 7,200 | 1,05,208 | 663 |
| 9 | 60,000 | 5,951 | 7,200 | 1,18,359 | 757 |
| 10 | 60,000 | 5,951 | 7,200 | 1,31,510 | 852 |
| 11 | 60,000 | 5,951 | 7,200 | 1,44,661 | 947 |
| 12 | 60,000 | 5,951 | 7,200 | 1,57,812 | 1042 |
The EPF balance for the entire year can be calculated by adding the balance at the end of 12 months and the total sum of the interest that is generated over the course of the year.
Therefore, the total EPF balance (1,57,812 + 6,249) is Rs.1,64,061.
Withdrawal of the Employees Provident Fund amount
Employees will be able to withdraw the entire PF amount once they reach the age of 58 years. Individuals can also withdraw their EPF amount if they remain unemployed for 2 months or more. Withdrawal of EPF is also possible under the below-mentioned circumstances:
- If the money is needed to repay a home loan or for medical expenses.
- If you have reached the age of 57 years, 90% of the total EPF balance can be withdrawn.
Any withdrawals that are made after an individual completes 5 years of service are tax exempt.
Conclusion
The EPF scheme is one of the most popular savings schemes in India due to its high interest rates and tax benefits. Contributions made towards the scheme are also risk-free since it is regulated by the EPFO. The EPFO has also launched several new measures where the withdrawal of funds and transfer of the PF amount can be done easily.