EPF Interest calculation- Every year the government decides the interest on the amount deposited in the EPF account. Interest on EPF is very important.
Provident Fund Account (EPF Account) is a good savings option. The Employees Provident Fund Organization (EPFO) manages the accounts of crores of account holders. In these accounts, 24 percent of the amount is deposited by both the employee and the employee, including basic and dearness allowance. Every year, the government decides the interest rate on the amount deposited in this EPF account. The interest that accrues on the deposit is very important. But, do you know how to calculate EPF Interest calculation in EPF account? Generally, the account holders believe that interest is paid on the entire money deposited in the provident fund. However, this does not happen. There is no interest calculation on the amount that goes to the pension fund in the PF account.
This is how the EPF Interest calculation
Interest is calculated on the basis of the money deposited in the EPF account every month i.e. Monthly Running Balance. But, it is deposited in the account at the end of the year. According to the rules of EPFO, if any amount is withdrawn from the balance amount on the last date of the current financial year, then it is deducted for 12 months of interest. EPFO always takes the opening and closing balance of the account. This amount is fixed at the beginning and end of a financial year. To estimate this, the monthly running balance is added and multiplied by the rate of interest / 1200.
Withdrawing money also makes an impact
If any amount is withdrawn during the current financial year, then the amount of interest (EPF Interest calculation) is taken from the beginning of the year to the month immediately before the withdrawal. The closing balance of the year (PF balance) will be its opening balance + contribution-withdrawal (if any) + interest.
Think like this
Basic Salary + Dearness Allowance (DA) = ₹ 30,000
Employee contribution EPF = 12% of ₹ 30,000 = ₹ 3,600
Employer contribution EPS (subject to limit of 1,250) = ₹ 1,250
Employer contribution EPF = (₹ 3,600 – ₹ 1,250) = ₹ 2,350
Total monthly EPF contribution = ₹ 3,600 + ₹ 2350 = ₹ 5,950
Contribution to PF by April 1, 2020
Total EPF contribution in April = ₹ 5,950
Interest on EPF in April = Nil (no interest in the first month)
EPF account balance at the end of April = ₹ 5,950
EPF contribution in May = ₹ 5,950
EPF account balance at the end of May = ₹ 11,900
Interest calculation for each month (EPF Interest calculation) = 8.50% / 12 = 0.007083%
Computation of interest on EPF of May = ₹ 11,900 * 0.007083% = ₹ 84.29
This formula is applied
The interest rate for any financial year is notified by the government. At the end of the current financial year, the interest calculation (EPF Interest calculation) is done. By adding the balance amount on the last date of every month of the year, the interest amount is extracted by multiplying the fixed interest rate by 1200 times that amount.