If you are a job worker, then you will also have an EPF account. Interest is paid on the amount deposited by the worker or employer. Every year you get returns in your EPF account as interest. Interest is calculated on the basis of the amount deposited every month on the money deposited in the EPF account. But it is usually deposited on the last day of the current financial year. According to the EPFO, if any amount is withdrawn during the current financial year, it is reduced to 12 months of interest.
The rate of interest on EPF is announced every year. An interest rate of 8.5 percent has been set for the financial year 2019-20. It is set by the Central Board of Trustees of EPFO in consultation with the Ministry of Finance. Another important thing is that the amount deposited in the EPS account does not get interest, that is, there is no calculation of interest on the amount that goes to the pension fund.
This is how interest is calculated
With an example, we can understand how interest is calculated in EPF account.
- Worker’s basic salary (basic salary) + dearness allowance (DA) = 15 thousand rupees
- Employee’s contribution to EPF = 12% of Rs. 15000 = Rs. 1800
- Employers’ contribution to EPF = 3.67% of Rs 15,000 = 550.5
- Employers’ contribution to EPS = 8.33% of Rs 15000 = Rs 1249.5
- Total contribution to EPF account = 1800 + 550.5 = Rs 2350.5
- Contribution to EPF account every month = 1800 + 550.5 = Rs 2350.5
- This amount will be deposited in the EPF account every month and it will be credited to the interest account at the prescribed interest rate (8.5 per cent annually for the financial year 2019-20).
- According to the annual interest rate of 8.5 percent, interest will be given at the rate of 0.708 percent every month, but it will be credited on the last day of the financial year.
- Now suppose that you have joined the office in April 2019, then the amount deposited in EPF account in April will not get interest.
- In May 2019, you will have Rs 4701 (2350.5 + 2350.5) in your account and you will get 4701 * 0.71% = Rs 33.38 on it. Similarly, you can calculate the interest of the other month.