The Central Board of Trustees of EPFO has suggested an 8.51% annual rate of interest to be credited for EPF balance to subscribers accounts for the financial year 2020-21.
TECHNIQUES FOR THE CALCULATION OF EPF INTEREST RATES
The EPFO chooses the rate of interest for the EPF scheme on a yearly basis. The interest rate is dependent on the market situation and is vetted by the finance ministry. The interest rate can be measured either by using the step method or the formula method. The rate of interest for the FY 2020-2021 is 8.51%.
For example, we assume, EPF Basic salary and dearness pay to be ₹15,000 and with a current rate of interest of 8.5%
Example of estimation 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%
Total EPF Contribution for the first month = ₹ 2,350
Interest on the EPF contribution for April = Nil (No interest for the first month)
EPF account balance at the end of April = ₹ 2,350
Total EPF Contribution for May = ₹ 2,350
Total EPF contribution for May = ₹ 4,700
Interest on the EPF contribution for May = ₹ 4,700 * 0.7083% = ₹33.29
THE INTEREST RATE ON INOPERATIVE EPF ACCOUNTS
As per the law, a provident fund (PF) account gets void in the case where an employee retires from service after accomplishing the age of 55 years or moves abroad forever or dies and an application for withdrawal of his accrued balance is not made within 36 months. Until that time, the interest amount will continue to accumulate on the PF corpus.
In Budget 2021, the government had offered to tax the interest earned on contributions made over and above ₹2.5 lakh. Currently, interest gained on PF contributions is tax-free. Even the accumulated PF balance is excluded from tax if a person has provided continuous service for a period of five years or more.