The effect of compounding interest on EPF accounts

Employee Provident Fund is a savings scheme offered by the Government of India to the employees of public and private companies. As per the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, any private company that has over 20 employees must offer EPF to its employees.  

Contribution towards the Provident Fund 

Employer and employee contribute towards the Provident Fund account of the employee. In the salary components of the employee, if the basic salary and Dearness Allowance (DA) is less than Rs.15,000 p.m, the employer and employee contribute the same amount. 12% of basic salary + DA is contributed every month towards EPF.  

Employer and employee contribute towards the Provident Fund account of the employee. In the salary components of the employee, if the basic salary and Dearness Allowance (DA) is less than Rs.15,000 p.m, the employer and employee contribute the same amount. 12% of basic salary + DA is contributed every month towards EPF.  

From the employer’s contribution of 12%, 8.33% is contributed towards Employee Pension Scheme (EPS) and 3.67% towards EPF of the employee’s account. If the employee’s salary (basic salary + DA) is more than Rs.15,000 per month, the employee can choose to contribute a higher amount towards EPF. For this, the employee has to fill a form and hand it over to the EPF authorities. The employer’s contribution is restricted to 12% of Rs.15,000. 

Accounting year for EPF account 

Accounting year for Employee Provident Fund account begins on 1^st March and ends on February 28^th. Interest accrued for the accounting year is credited to the employee’s account on 31^st March.  

Calculate interest for EPF 

The Employee Provident Fund Organization decides the interest rate for EPF every financial year. Finance ministry decides on the interest rate by considering the market conditions. The interest rate for EPF accounts for the year 2021-2022 is 8.50% p.a. as decided on March 2021.  

Here’s an example of interest rate calculation: 

An individual’s basic salary + DA = Rs.20,000 

Interest rate on EPF: 8.5% 

Employee’s contribution (EPF) = Rs.2,400 (12% of Rs.20,000) 

Employer’s contribution (EPF) = Rs.734 (3.67% of Rs.20,000) 

Employer’s contribution (EPS) = Rs.1,666 (8.33% of Rs.20,000) 

Employer’s contribution (EPS under Rs.15,000 ceiling) = Rs.1,249.50 (8.33% of Rs.15,000) 

Employer’s excess contribution=Rs.416.50(Rs.1,666-Rs.1,249.50)   

The excess contribution is added to EPF  

Employer’s contribution (EPF Total) = Rs.1,151 (Rs.417+734) 

Total monthly contribution towards EPF = Rs.3,551 (Rs.2,400+Rs.1,151) 

Interest calculation: 

Yearly interest rate divided by number of months in a year = interest percentage 

8.50% /12 = 0.70% 

Total contribution towards EPF = Rs.3,551 p.m. 

EPF contribution per month * interest percentage derived = interest amount 

3551 * 0.70% = Rs.24.85  

It is rounded off to Rs.25 

Compounding interest on an EPF account 

Considering the same example as above, here is a detailed calculation of interest amount per month and how it compounds through the accounting period. 

Interest amount of Rs.275 is credited on the EPF amount of Rs.42,612. Interest Rs.275 is credited to the employee’s EPF account on March 31^st. If the funds are not withdrawn, the interest will continue to be calculated upon the total balance in the EPF account.  

Interest rate calculated for the funds in the EPF account are subject to the interest rate announced for EPF in that particular financial year. So, if the interest rate changes in the year 2022-2023, the interest calculation will be done based on the interest rate of the current year.  

The closing balance of 2021-2022 = Rs.42,612 will be carried forward to the next year as opening balance. Similar calculation as shown in the table above will be done to compute compounding interest amounts.  

Now that you are familiar with the method of calculating contributing amounts, interest rates and interest amounts, you can be at peace with the savings you have made. If you have any questions, feel free to shoot them in the comments section below. 

Written by: Marketing Fincity