Interest on the Employees’ Provident Fund (EPF) is calculated on the contributions made by the employee as well as the employer. The Central Board of Trustees of Employees’ Provident Fund Organisation (EPFO) has recommended an 8.50% annual rate of interest to be credited for EPF subscribers accounts for the financial year 2020-21.
Methods for the calculation of EPF interest rates: The EPFO decides the rate of interest for the EPF scheme on a yearly basis. The rate of interest is dependent on the market conditions and is vetted by the finance ministry. The interest rate can be calculated either by using the step method or the formula method. The rate of interest for the FY 2020-2021 is 8.5%.
For example, we assume, EPF Basic salary and dearness allowance to be ₹15,000 and with a current rate of interest of 8.5%
Example of calculation of interest for a financial year-
Basic Salary + Dearness Allowance = ₹ 15,000
Employee’s contribution towards EPF = 12% of ₹ 15,000 = ₹ 1,800
Employer’s contribution towards EPS = 8.33% of ₹ 15,000 = ₹ 1,250
Employer’s contribution towards EPF = Employee’s contribution – Employer’s contribution towards EPS = ₹ 550
Total EPF contribution every month = ₹ 1,800 + ₹ 550 = ₹ 2,350
The interest rate for 2019-2020 is 8.50%.
When calculating interest, the interest applicable per month is = 8.50%/12 = 0.7083%
Total EPF Contribution for the first month = ₹ 2,350
Interest on the EPF contribution for April = Nil (No interest for the first month)
EPF account balance at the end of April = ₹ 2,350
Total EPF Contribution for May = ₹ 2,350
Total EPF contribution for May = ₹ 4,700
Interest on the EPF contribution for May = ₹ 4,700 * 0.7083% = ₹33.29
Interest rate on Inoperative EPF accounts
In Budget 2021, the government had proposed to tax the interest earned on contributions made over and above ₹2.5 lakh. Currently, interest earned on PF contributions is tax-free.