Employee Provident Fund is a retirement scheme available to all salaried individuals. In this scheme, the employer contributes 12% on the basic pay of the individuals with a salary of up to Rs. 15,000. If the salary is higher, the employer contribution may vary according to certain criteria. Here’s a quick guide to walk you through the EPF scheme and how to calculate the interest accrued on your EPF balance.
EPF Interest Rates 2022-23
The EPF interest rate is subject to an annual review, and for the fiscal year 2022-23, it stands at 8.15%. When the EPFO announces the interest rate for a fiscal year and that year concludes, the interest rate is calculated both on a monthly closing balance basis and an annual basis.
The newly published interest rates remain applicable for the upcoming fiscal year, starting from April 1st of one year and ending on March 31st of the following year.
Here are key points to remember about the EPF Interest Rate:
- The interest rate of 8.15% is now in effect and applies to EPF deposits.
- While interest is computed monthly, it is credited to the Employees’ Provident Fund account only once a year on March 31st of the respective fiscal year.
- The interest accrued is added to the balance for the following month, i.e., April's balance, and is factored into the interest calculation.
- If no contributions are made to an EPF account for 36 consecutive months, the account becomes dormant or inoperative.
- Employees who have not reached retirement age may still earn interest on their inactive accounts.
- Inactive accounts of retired employees do not accrue interest.
- Interest earned on dormant accounts is taxed at the member's income tax slab rate.
- Employees do not receive interest on contributions made to the Employees’ Pension Scheme. However, after the age of 58, a pension is provided from this amount.
EPF Contribution by Employee and Employer
Before you calculate the interest on your EPF account, you must understand how contributions to you EPF account balance are made. First, there is the employee contribution which may either be 12%, 10% or 8% (in the case of women employees) of basic pay plus dearness allowance for the first 3 years of employment. The employer EPF contribution will match that at 12% or 10%. An employer is eligible to pay 10% if the company in question has fewer than 20 employees, has sick units, or meets certain specific conditions that are specified by the EPFO.
Understanding the wage ceiling
If your income exceeds Rs. 15,000, your employer is free to make contributions based on one of three methods:
- Your employer may choose to restrict both your contributions to Rs. 15,000 per annum.
- Your employer may choose to continue to match your contribution even over the wage ceiling.
- Your employer may allow you to contribute 12% of your basic pay plus dearness allowance while they restrict their share of the contribution to the celling of Rs. 15,000.
How to calculate the interest on your EPF balance?
The interest on your PF balance is computed monthly but only credited to your account at the end of the financial year, specifically on March 31 each year. To calculate the interest on your EPF, you employ the step method: multiply your closing balance at the end of the month by the current PF interest rate and divide by 12.
For example, the rate for the 2016 financial year was 8.8%, the interest rate for 2017 was 8.65% and the rate for the 2018 financial year was 8.55%.
If we assume the rate of interest for EPF to be 8.65% and your basic salary plus dearness allowance to be Rs. 50,000. You as an employee will contribute 12% of the total amount, which equals Rs. 6,000.
Let’s say your employer chooses to contribute 12% of your basic salary, minus 8.33% of Rs. 15,000 towards the EPS (Rs. 6,000 – Rs. 1,259.50).
This amounts to Rs. 4,750, when rounded off.
The opening balance in your account will be Rs. 10,750.
The interest accrued in the first month is zero, as the opening balance is zero. In the second month, the interest will be calculated on the opening balance of Rs. 10,750.
Assuming the interest rate is 8.65% per annum, your monthly interest will be
8.65% / 12 = 0.72%
Therefore, your monthly interest will be 0.72%*10,750 = Rs. 77.4, which will be rounded off to Rs. 77.
If the EPF balance is Rs. 10,750, and the rate of interest is 8.65%, you can calculate interest according to this formula:
(8.65% / 12)*10,750 = Rs. 77.4 = Rs. 77
The closing balance for the year, which will go on to be the opening balance for the next year, will consist of the balance at the end of 12 months plus the total interest accrued in that year.
You can also use online calculators like this one to calculate your EPF.
Withdrawals from EPF
You will be eligible to withdraw the full amount of your EPF only when you reach 58 years of age, or when you have been unemployed for more than two months. You may be able to make withdrawals before time under specific circumstances such as:
- If you are using the money to cover medical expenses or pay off a home loan
- If you have been unemployed for more than 60 days or are intending to move abroad permanently
If you are 57 years old, you are eligible to make a withdrawal of up to 90% of the total amount, without any restrictions. All withdrawals made after 5 years are exempt from tax. If you make a withdrawal within 5 years; however, you will be required to pay income tax on that amount.
In conclusion, calculating the interest on your EPF balance is a straightforward process that allows you to monitor the growth of your savings effectively. By following the steps outlined in this article, you can easily estimate the interest you'll earn on your EPF balance, ensuring that you are well-prepared for retirement and any financial goals you have in mind. So, start crunching those numbers and take charge of your financial well-being.