Employees Future Fund Account: Interest rate calculation method and formula
Salary earners contribute a certain amount to the employee provident fund each month and an equal contribution is made by the employer. The minimum monthly contribution is 12 percent of the basic salary. However, up to 100 per cent of the basic salary can be voluntarily contributed by the employee. Does not match the employer’s voluntary contribution and may stick to a 12 percent contribution. With the contribution of employees and employers together, the amount of interest is credited to the employee’s PF account.
Interest rates are reported by the government for each financial year. For FY 2021-22, the EPF interest rate is 1 8.1 percent Rules relating to the calculation of interest on provident fund contributions are laid down under section 60 of the Employees Provident Fund Scheme, 1952.
In EPF, interest is accrued on the monthly running balance. Three things are important when calculating the amount of PF interest – the opening balance, the contribution per year and any withdrawal within the year.
Interest for 12 months will be credited based on the closing balance of any amount withdrawn in the current year as on the last date of the previous year.
If someone has withdrawn any amount during the current year, iInterest will be credited from the beginning of the year to the end of the previous month.
On PF contributions accrued in the current year, interest will be credited to the PF account from the first of the month to the end of the current year.
Provident fund calculation formula
Once the interest rate for any financial year is declared, and the current year ends, the monthly closing balance is calculated. The full year interest is then calculated by multiplying the interest rate / 1200 by adding the monthly running balance.
Assuming 8.65% interest rate, the amount of interest = 1104740 * 8.65 / 1200 = Rs. 7963
The closing balance for the year will be: opening balance + contribution – withdrawal + interest
= Rupees 112345 + 1200 – 25000 + 7963 = 96508 rupees
In the case of a member making a final settlement, the calculated interest is added to the amount of his settlement. Interest is calculated separately for employee shares of the provident fund and employer shares.
No interest is calculated on the pension contribution of employees towards the pension scheme as benefits are based on the length of service and average wages at the time of departure, whether the benefit is through pension or withdrawal benefits.
At the time of final settlement, if a member has made a final settlement and the current year’s interest has not been notified, interest is immediately accrued on the basis of the rate declared for the previous year. However, in case of declaring interest rate more or less, no amendment is made in the amount settled.
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