EPFO interest calculation: Interest is calculated on the basis of monthly running balance deposited in the EPF account every month. But, it is deposited at the end of the year.
EPFO interest calculation: 24% of the basic and dearness allowance of both the employee and the employer is deposited in the Provident Fund account (EPF account). Every year the government pays interest on the amount deposited in this EPF account. This time also interest credit has started. Do you know how the EPF interest calculation is done in the PF account?
Account holders believe that interest is earned on the entire money deposited in the Provident Fund. But, it doesn’t happen. There is no interest calculation on the amount that goes to the pension fund in the PF account.
Calculation of Interest on EPF
EPF interest calculation is done on the basis of the monthly running balance deposited in the EPF account every month. But, it is deposited at the end of the year. According to the rules of EPFO, if any amount is withdrawn in a year from the balance amount on the last date of the current financial year, then it is deducted 12 months interest. EPFO always takes the opening and closing balance of the account. To calculate this, the monthly running balance is added and multiplied by the rate of interest / 1200.
Damage caused by continuous withdrawal
If any amount is withdrawn during the current financial year, then the amount of interest (PF interest calculation) is taken from the beginning of the year to the month immediately preceding the withdrawal. The year’s closing balance (PF Balance) will be its opening balance + contribution-withdrawal (if any) + interest.
Think of it as
- 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 in EPF
- Total EPF contribution in April = ₹ 5,950
- Interest on EPF in April = Nil (No interest in 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
- Monthly interest calculation (EPF Interest calculation) = 8.50%/12 = 0.007083%
- Calculation of interest on May EPF = ₹ 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 calculation of interest (EPF interest) is done. By adding the balance amount on the last date of every month of the year, dividing that amount by dividing the fixed interest rate by 1200, the interest amount is extracted.
