EPFO members to get 8.5% interest for FY19-20 at one go.
The compound interest is credited on monthly running balance basis at the statutory rate declared for each year. Closing balance for the year = opening balance + contributions – withdrawal (if any) + interest
New Delhi: Subscribers of Employees’ Provident Fund Organisation (EPFO) are likely to get the entire 8.5% declared interest rate for FY2019-20 at one go as EPFO has been able to sell its equity holdings and earned higher-than-expected returns in December due to the market rally. EPFO has now double the surplus projected three months back.
Note that both employees and employers together contribute 24% of the basic salary plus dearness allowance every month towards the employee’s provident fund (EPF). Once the interest rate for any financial year is notified, and the current year ends, EPFO calculates the month-wise closing balance in the PF account and then the interest for the whole year.
How interest is calculated on the PF balance:
The monthly running balance is calculated and then multiplied with the interest rate/1200. In case a member is retiring and taking a final settlement and the interest for the current year is not notified, then as per EPFO, interest is credited based on the rate declared for the immediately preceding year. If any sum is withdrawn during the current financial year, interest from the beginning of the year till the last date of the month preceding the month in which withdrawal took place is taken into account.
As per the EPFO website, the compound interest is credited on monthly running balance basis at the statutory rate declared for each year. Closing balance for the year = opening balance + contributions – withdrawal (if any) + interest.
For instance: An employee's basic Salary + Dearness Allowance = Rs 30,000. Then Employee’s contribution towards EPF will be 12% of Rs 30,000 that is Rs 3,600. Employer’s contribution towards EPS will be Rs 1,250. Employer’s contribution towards EPF will be Rs 3,600 – Rs 1,250 that is Rs 2,350. This means, total EPF contribution every month will be Rs 3,600 + Rs 2350 = Rs 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%. 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. There are several PF interest calculators available online which can be used to calculate interest on the balance in your PF account.
Assuming the employee joined service on 1 April 2019, contributions started for the financial year 2019 – 2020 from April 2019 only. Then total EPF Contribution for April will be Rs 5,950. For April, interest on the EPF contribution will be nil as there is no interest for the first month. EPF account balance at the end of April will be Rs 5,950. After the contribution of Rs 5,950 in May, total EPF account balance as in May will be Rs 11,900. The interest on the EPF contribution for May will be Rs 11,900 x 0.007083% = Rs 84.29
Employees must note that as per EPFO, no interest is calculated on pension contribution since benefits are based on the service length and average wages at the time of exit, whether the benefit is through pension or withdrawal benefit. Of the employer's 12% contribution, 8.33% goes towards pension corpus while the rest goes towards EPF. Also, interest is separately calculated for the employee share and employer share of provident fund.
No interest is credited in the members’ account from the date when the account has become inoperative meaning if a member has retired or has migrated abroad permanently or has passed away and no claim has been received for settlement for 36 months from the date when the amount became payable, then the account becomes inoperative from that date and no interest is credited.