If you are a salaried employee, then chances are that you have an Employee’s Provident Fund (EPF) account that you regularly make contributions from your salary deductions. You might know what the latest EPF interest rates are, but do you know how to calculate interest on your EPF account balance? Or do you know how is provident fund interest calculated in India?
If you don’t, then this article will tell you exactly that.
Before I share the actual working of the EPF account and how interest is calculated on EPF account balance, familiarize yourself with few useful terms:
- Employee EPF Contribution: This is your contribution towards the EPF corpus. As per the latest EPF rules, the employee contribution is 12% of Basic Pay + Dearness Allowance.
- Employer EPF Contribution: Employers also contribute 12% but it is distributed across the EPF (Employee Provident Fund) and the EPS (Employee Pension Scheme). The Employer’s EPF Contribution is divided between 3.67% into EPF and 8.33% into EPS. In reality, the contributions are made on a wage ceiling (Basic Salary + DA) or a new salary threshold of Rs 15,000. But if the income exceeds the wage threshold of Rs 15,000, then there are 3 standard methods for calculating the contribution amount. And the employer is free to use any one of the methods. But since this is a simple calculator, we keep it at 3.67% in EPF as Employer’s Contribution.
- EPF Interest Rate: As of now, the EPF interest rate is 8.50% (FY 2020-21). But this rate is revised every year. You can also check the past changes in historical EPF interest rates.
Now let’s take a simple example.
Let’s say your salary (Basic Salary + Dearness Allowance) = Rs 60,000 per month. Now following are the contributions made by you (employee) and the employer:
- Employee’s contribution towards EPF = 12% of Rs 60,000 = Rs 7200
- Employer’s contribution towards EPS = 8.33% of Rs 60,000 = Rs 4998
- Employer’s contribution towards EPF = 3.67% of Rs 50,000 = Rs 2202
So the Total EPF contribution every month = Rs 7200 + Rs 2202 = Rs 9402.
The EPF interest rate for FY 2020-21 is 8.50%. So let’s use this for our example.
The interest on EPF balance is calculated monthly. Remember this part as we will come back to this point a little later.
So the EPF interest rate applicable per month is = 8.50%/12 = 0.7083%
Assume that you (the employee in this case) joined the job exactly on 1st April 2020. So your and your employer’s EPF contributions started for the financial year 2020–21 from the month of April.
Here is how it is calculated:
- EPF Account Balance (Start of April 2020) = Rs 0
- EPF contribution (April 2020) = Rs 9402
- EPF Account Balance (End of April 2020) = Rs 9402
- Interest accrued on EPF Balance (April 2020) = Nil (No interest in first month)
- EPF Account Balance (Start of May 2020) = Rs 9402
- EPF contribution (May 2020) = Rs 9402
- EPF Account Balance (End of May 2020) = Rs 18,804
- Interest accrued on EPF Balance (May 2020) = Rs 133.19 (0.7083% of Rs 18,804)
- EPF Account Balance (Start of June 2018) = Rs 18,804
- EPF contribution (June 2020) = Rs 9402
- EPF Account Balance (End of June 2020) = Rs 28,206
- Interest accrued on EPF Balance (June 2020) = Rs 199.78 (0.7083% of Rs 28,206)
- And this goes on month after month…
Now comes the important part. As you saw, the EPF interest on balance is calculated every month. It accrues every month. But it is deposited only once. And that is at the end of the financial year (on or after 31st March 2021 in the above example).
To emphasize here its again – the EPF interest is calculated every month but deposited by EPFO once only at the end of the financial year. So there is not monthly compounding of interest, etc. in the case of EPF but only annual compounding.
So that is how interest on EPF balance is calculated by EPFO. I hope you found the example simple enough to understand.
I have created a small free excel EPF maturity calculator that can be used to estimate the EPF corpus when you retire. It is a simple, easy-to-use and takes the EPF contributions of the employee and the employer, and then calculates the interest on the contribution that year and also on the EPF balance at the start of the year. The important thing to understand here is that EPF interest is computed each month but it is deposited once only at the end of the financial year.
So here is the link to download it for free:
Employee Provident Fund (or EPF) is one of the safest debt-based savings instruments available in India as it is backed by the sovereign guarantee of the government of India and managed by the EPFO. It allows employees to save a proportion of their salary every month. And it is one of the first savings that most young employees begin with. It is mandatory so there is no discretion about whether to save or not. In a way, it’s a good thing that some savings are being done compulsorily.
And it gets a super investor-friendly tax treatment that makes EPF a tax-free investment instrument for the salaried class having the status of EEE*, i.e. Exempt-Exempt-Exempt category of savings products.
This means that:
- 1st E – investments in EPF up to Rs 1.5 lakh per year eligible for deduction.
- 2nd E – Interest earned on EPF is tax exempted.
- 3rd E – EPF Maturity amount is exempt from tax partially now (till annual contribution of Rs 2.5 lakh per year).
*Recently, the government has decided to tax the interest on EPF contributions above Rs 2.5 lakh per year. Given this change in the taxation status of EPF, many EPF account holders are now questioning whether it makes sense to invest more than Rs 2.5 lakh in EPF or not?
Many people would want to voluntary contribute more than the statutory limit to their EPF accounts given the solid nature of this savings instrument. That can be done easily via VPF. An employee can contribute an additional amount (over and above the 12% of basic salary in EPF). This is called Voluntary Provident Fund. However, the employer is not bound to do a matching contribution. And VPF is not a separate account. It is only a means of investing additional money in the same EPF account. Both VPF and EPF have the same interest rates. You can have a look at historical VPF interest rates if you want. Also, check out the discussion on PPF Vs. VPF.
But inspite of being a solid retirement savings product, please do not be under the notion that its enough for retirement. Your Provident Fund is not enough for retirement.
A good retirement portfolio should have a smart mix of both equity and debt in it. So debt aspect can definitely be handled via provident fund like EPF and PPF and NPS to an extent. But since retirement for most young savers is decades away, it is very important to have equity investments as part of your retirement savings plan. And that can be handled by regular SIP in well-chosen, investment-worthy mutual funds.
If you want to save properly for retirement and all other important financial goals like children’s education, house purchase, etc. then it is better to take professional help to plan your financial life instead of randomly investing here and there and end up having a directionless portfolio of instruments that is bound to take you nowhere in your financial lives.
So that’s it about EPF interest calculation.
I hope you now understand how to calculate Employees’ Provident Fund balance and interest on EPF accounts in India 2021.