EPF Interest Rate 2019-20: How to Calculate Interest on EPF

Amidst the outbreak of COVID-19 Pandemic in India, the Finance Minister Nirmala Sitharaman announced on 26th March that the government will pay the entire Employees Provident Fund (EPF) contribution for the next 3 months for both the employer and the employee (12 per cent each) for certain section of employees.

 

Further announcing the coronavirus economic relief package, she adds that this contribution is for those establishments who have a maximum of 100 employees and majority of them earn less than Rs. 15,000. “Government ready to amend the regulation of EPF due to this pandemic so that workers can draw upto 75% non-refundable advance from credit in PF account or 3 months salary, whichever is lower.”

Employees’ Provident Fund (EPF) is a retirement benefits scheme where the employee contributes 12% of his basic salary and dearness allowance every month. The employer also contributes an equivalent amount (8.33% towards EPS and 3.67% towards EPF) in the employee’s account. The employee can withdraw the accumulated corpus at the time of retirement and also during the service period under some conditions and for specific purposes.

EPF Interest Rate

The EPF interest rate is reviewed every year by EPFO Central Board of Trustees after consultation with the Ministry of Finance. The review of the EPF interest rate for a financial year is set at the end of that financial year (most probably in February but may go up to April or May).

The EPF interest rate FY2020 is set at 8.50%, a cut of 0.15% from 2018-19

EPF Historical Interest Rates

EPF Contribution

EPF Contribution consists of two parts depending on the entity that makes the contribution – Employee’s contribution and Employer’s contribution.

The employee makes a contribution of 12% of basic salary + dearness allowance towards his EPF account. The employee has to make a lower 10% contribution in case the establishment has less than 20 employees or for industries such as (a) Jute (b) Beedi (c) Brick (d) Coir and (e) Guar gum Factories.

The employer makes a contribution of 8.33% towards the EPS (Employees’ Pension Scheme) account of the employee. Another 3.67% is added to the EPF account of the employee. The employer also makes 0.50% of contribution towards the EDLI (Employees’ Deposit Linked Insurance) account of the employee.

The employer has to pay an additional charge for administrative accounts at a rate of 0.50% with effect from 1st June 2018. The minimum administrative charge is ₹ 500 and if there is no contribution for a specific month, the employer has to pay a fee of ₹ 75 for that month.

How to Calculate Interest

EPF interest is calculated every month but is deposited in the account at the end of the financial year. The following example explains the interest calculation on EPF of the employee:

The following example explains:

1. The interest calculation on EPF of the employee or EPF interest rate calculation for single employee 
2. The EPF Contributions by employee and employer

Example of calculation of interest for a financial year-

Basic Salary + Dearness Allowance = ₹ 15,000

• Employee’s contribution towards EPF = 12% of ₹ 15,000 = ₹ 1,800
• Employer’s contribution towards EPS = 8.33% of ₹ 15,000 = ₹ 1,250

Employer’s contribution towards EPF = Employee’s contribution – Employer’s contribution towards EPS = ₹ 550

• Total EPF contribution every month = ₹ 1,800 + ₹ 550 = ₹ 2,350

The interest rate for 2019-2020 is 8.50%.

When calculating interest, the interest applicable per month is = 8.50%/12 = 0.7083%

Assuming the employee joined a service on 1st April 2019, contributions start for the financial year 2019 – 2020 from April

*The interest will be calculated every month but will be deposited only at the end of the financial year (on 31st March 2020 in this case)

EPF interest rate for inactive accounts

In FY 2011-12, the EPFO had suggested to stop paying interests to EPF account in which negligible or no contributions are made for more than 3 years. However, this decision has been rolled back in 2016. 

Consequently, even the accounts which are lying inactive for more than 3 years will be credited with interest earned according to the existing rates. The current rate of interest, FY 2019-20, is 8.50% per annum. Nonetheless, you will not earn interest if your account has become inoperative i.e. after the end of scheme tenure; when you have attained the age of 58 and haven’t withdrawn the EPF balance.

Important Points to be Considered

1) Employee Provident Fund (EPF)

• The maximum wage ceiling for the calculation of EPF contributions is ₹ 15,000
• The employee can make contributions at a higher rate but the employer is not bound to pay at the higher rate
• The employee and the employer has to submit a joint request for making higher contributions in the EPF account
• The employer, however, will have to pay higher administrative charges (at the rate including 0.50% of the employee’s wage above ₹ 15,000)
• There is no wage ceiling (₹ 15,000) for international workers

2) Employees’ Pension Scheme (EPS)

• The employer is not required to make the contribution when the employee reaches 58 years of age and is still in service
• The employer need not pay EPS contribution when the pensioner is drawing a reduced pension and re-joins as an employee
• The employee, who joins the service at an age of 50 or above and is not availing pension, does not have an option of not getting the pension contribution. The employee, or the employer, cannot say that the contribution should not be furnished as he will not be able to complete 10 years of service to avail pension benefits

3) Employees’ Deposit Linked Scheme (EDLI)

• The contribution to be made should be at a rate of the maximum wage ceiling of ₹ 15,000 even if the employee’s share is more than ₹ 15,000
• Each contribution is rounded off to the nearest rupee
• EDLI contribution has to be made even after the employee has completed the age of 58 years and should continue until the member is in service!

Frequently Asked Questions

Q.1: When is the EPF interest credited?

Ans: According to the specifications of The EPF Act of 1952, interest is credited to the member’s account as per the monthly running balances with effect from the last day of each financial year.

Q.2: Has EPFO hiked the interest rate on PF deposits for 2019-20?

Ans: According to the recent interest rate revision rolled out by the Finance Ministry, the EPF interest rate has been lowered down to 8.50% (2019-20) from 8.65% (2018-19).

Q.3: Is EPF interest taxable?

Ans: Till the date of retirement, EPF balance is exempted from tax payments. But, interest credited after retirement stands taxable as an ‘income from other sources’.

Q.4: What is interest rate difference between epf and ppf?

Ans: The interest rate for EPF FY 2020 is 8.50% whereas the rate of interest for PPF 2020-21 is 7.1%

Q.5:  Why EPF interest is not updated yet?

Ans: Recently, the EPF interest rate was revised to 8.50% by the EPFO. However, there are certain arguments which are not yet resolved. As soon as the issues are cleared, interest rates will be credited to the accounts