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EPF: How interest gets added to your retirement fund, when it is not available

Interest on EPF: EPFO ​​has decided to pay 8.5 percent annual interest rate on Employees Provident Fund (EPF) for the financial year 2019-20.

Interest on EPF

Retirement fund body EPFO ​​has decided to pay 8.5 percent annual interest rate on Employees Provident Fund (EPF) for the financial year 2019-20. This is the lowest interest rate of EPF in last 7 years. Millions of salaries contribute to the EPF every month, which is a retirement benefits scheme. An employee contributes 12 per cent of his salary to the EPF. The employer/company also contribute an equal amount of 8.33% for EPS and 3.67% for EPF in the employee’s account. The maximum salary limit for EPS is currently Rs 15,000 per month. Therefore the maximum contribution to EPS is Rs 1250 per month only.

If you are also employed, then you will want to know from time to time how much balance is there in your EPF account. And how the interest is calculated on this balance. Explain that EPF interest is calculated every month, but the interest amount is deposited in your account only at the end of the financial year. Contribution to EPF fetches higher interest than sovereign guaranteed fixed income option like PPF.

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How is interest calculated on EPF

The EPF interest calculation is done every month, but it is credited to the account at the end of the financial year. You can understand the complete calculation from this example.

Basic salary + dearness allowance = Rs 15,000

Employee’s contribution to EPF account = 12% of Rs 15,000 = Rs 1800

Employer / company contribution to EPS account = 8.33% of Rs 15,000 = Rs 1250

Employer / company contribution to EPF account = Employee’s contribution to EPS account – Employer / company contribution = Rs 550

Total EPF contribution every month = Rs.1800 + Rs.550 = Rs.2350

The interest rate for the year 2019-20 is 8.5 percent.

Applicable interest per month = 8.5% / 12 = 0.7083%

Suppose the employee has joined the job on 1 April 2019. In such a case, the contribution for the financial year 2019–20 starts from 1 April.

  • Total EPF contribution for April = Rs 2350
  • Interest on EPF contribution for April = Nil (no interest for the first month)
  • Balance in EPF account at the end of April = Rs 2350
  • Total EPF contribution for May = Rs. 2,350
  • Balance in May = Rs 4700
  • Interest on EPF for May = 4700 * 0. 7083% = Rs 33.29

(Note: Interest is calculated every month, but it is credited to the account at the end of the financial year i.e. 31 March.)

EPFO may sell ETF to pay 8.5% interest on PF, 2700 crores

EPF: When do not get interest

  • When the EPF Subscriber permanently leaves the country and settles abroad.
  • After the end of the job period, if there is no claim for EPF for 36 months.
  • When the EPF subscriber retires from his job after the age of 55 years.
  • When the EPF Subscriber dies.

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(source: paisabazaar.com)

Source: www.financialexpress.com

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