Interest Rate
calculation for EPF
At
present, 8.75% is the rate of interest applicable on EPF contributions made by
the employer and the employee. The calculation of the actual interest received
depends upon the salary of employee and also on the break-up of employer’s PF
contribution. In order to calculate the rate of interest on EPF,
let us first look into the EPF contribution structure for better understanding
of EPF.
Division of EPF contribution
EPF
contribution is divided into the following two distinct parts –
1. Contribution made by
employee
Contribution towards EPF is deducted from employee’s salary.
This is 12% of the basic salary of the employee.
2. Contribution made by
employer
Contribution made by the employer also is 12% of the basic
salary of the employee. However, this 12% is further subdivided into the
following four components –
o
Employee’s Provident Fund (EPF) – 3.67%
o Employee’s Pension
Scheme (EPS) – 8.33%
o Employee’s Deposit
Link Insurance Scheme (EDLIS) – 0.50%
o EPF Admin Charges –
1.10%
o EDLIS Admin Charges –
0.01%
NOTE:
This equal contribution from employee and employer is applicable only to
salaries where Basic Salary plus Dearness Allowance is less than or equal to
Rs.15,000. For cases where basic salary plus dearness allowance is greater than
this amount it is purely an employer’s choice to decide the amount of PF
contribution. However, the EPS contribution made by the employer remains fixed
at 8.33%.
In
case the basic salary of employee plus the dearness allowance is more than
Rs.15,000 then employer’s contribution towards employee’s EPF can have three
options to choose from. These alternatives are listed below.
1. Employer may restrict
your contribution as well as the company’s to Rs.15,000 per annum
2. Employer may
contribute towards EPF an amount equal to employee’s own contribution
3. Employer may restrict
your share in EPF as 12% of the salary while its own share to Rs.15,000.
Example of EPF
calculation for an employee
Let
us take an example of Amit who has just joined a new organization in the month
of June, at a monthly salary of Rs.10,000 (Basic + DA). Let us depict with the
help of a table, his monthly deductions and the applicable rate of interest.
Month
|
Employee Contribution (12%)
|
Employer Contribution (3.67%)
|
Monthly balance at the end of month
|
Interest applicable
|
June
|
1200
|
367
|
1567
|
Nil. Just Joined.
|
July
|
1200
|
367
|
1567+1567 = 3134
|
1567*8.75%/12 = Rs.11
|
August
|
1200
|
367
|
3134+1567 = 4701
|
3134*8.75%/12 = Rs.22
|
September
|
1200
|
367
|
4701+1567 = 6268
|
4701*8.75%/12 = Rs.34.27
|
October
|
1200
|
367
|
6268+1567 = 7835
|
6268*8.75%/12 = Rs.45.70
|
November
|
1200
|
367
|
7835+1567 = 9402
|
7835*8.75%/12 = Rs.57.13
|
December
|
1200
|
367
|
9402+1567 = 10969
|
9402*8.75%/12 = Rs.68.55
|
January
|
1200
|
367
|
10969+1567 = 12536
|
10969*8.75%/12 = Rs.79.98
|
February
|
1200
|
367
|
12536+1567 = 14103
|
12536*8.75%/12 = Rs.91.40
|
Total EPF Balance at
the end of the year
|
10,800
|
3303
|
14103+1567 = 15670
|
410.03
|
So,
in the example illustrated above, the total interest that Amit received for his
EPF contributions from June to February comes out to be Rs.410.03.
Important points to be
considered when calculating EPF interest
There
are a few points that need to be taken into account while calculating the rate of interest on
EPF contribution.
These are listed below.
·
EPF contributions are shown by the employer with respect to the
salary due. For example, salary for the month of August will be paid in
September and the EPF contribution for August will be shown in September and
not in August.
·
The interest amount received on EPF is rounded
off to the nearest decimal before being credited into your EPF account.
·
In the unfortunate event of death of employee, the interest is
payable till the month preceding the month in which death occurred.
Recent changes with
respect to EPF contributions
For
the year 2014-2015, the government changed a few EPF rules and guidelines. Here
is a brief introduction of all the changes that have been made.
·
All employees earning salary less than Rs.15,000 are supposed to
be provided mandatory EPF coverage by employers. Earlier, the limit for this
was Rs.6,500. However, considering the current inflation trends and the soaring
cost of living, government decided to raise this limit to include a higher
percentage of population under the EPF coverage.
·
Minimum pension per month for retired employees now stands at
Rs.1000. This amount is applicable to widow pension. Children pension is fixed
at Rs.250 minimum and that of orphans is Rs.750 per month. In addition to this,
to arrive at the pension amount, now an average of 60 months’ salary will be
taken into account as against the previous average of 12 months.
·
Insurance coverage and as a result the contribution by employers
has been raised by the government. EPS contribution now stands at Rs.1250 as
against the existing Rs.541 which the employers were mandated to pay earlier.
The insurance coverage has been increased to Rs.3 lacs from a previous value of
Rs1.56 lacs per employee.
The
overall effect of the above mentioned points, for employees in general would be
that since the individual contributions towards EPS and EPF have increased, the
take home salary for employees will be affected negatively. However, the good
news is, since interest is being earned and these contributions contribute
towards insurance and pension plans, employees can look at this as a good
investment strategy.
Considering
the overall positive effect EPF contributions have, employees can choose to
invest more in the EPF scheme by opting for VPF which is short form for
Voluntary Provident Fund Scheme. Any employee can contribute a flexible amount
of money towards VPF contribution. This amount, should however, in no way
exceed the monthly EPF amount for an employee.
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