EPF account is considered the best savings fund for salaried professionals.
Both the employee and the employer deposit 24% of the basic salary and the dearness allowance. Every year, the government decides the interest rate on the amount deposited in this EPF account. The interest that accrues on the deposit is very important.
Generally, the account holders believe that interest is paid on the entire money deposited in the PF account.
Here we take a look at how interest is calculated:
Interest is calculated based on the money deposited in the EPF account every month — Monthly Running Balance. But, it is deposited in the account at the end of the year. According to the rules of EPFO, if any amount is withdrawn from the balance amount on the last date of the current financial year, then it is deducted for 12 months of interest. EPFO always takes opening and closing balance of the account. This amount is fixed at the beginning and end of a financial year. To estimate this, the monthly running balance is added and multiplied by the interest rate / 1200.
If any amount is withdrawn during the current financial year, then the interest amount (EPF Interest Rate) is taken from the beginning of the year to the month immediately before the withdrawal. The closing balance of the year will be its opening balance + contribution-withdrawal (if any) + interest.
Basic Salary + Dearness Allowance (DA) = Rs 30,000
Employee contribution EPF = 12% of Rs 30,000 = Rs 3,600|
Employer contribution EPS (subject to limit of Rs 1,250) = Rs 1,250
Employer contribution EPF = (Rs 3,600 – Rs 1,250) = Rs 2,350
Total monthly EPF contribution = Rs 3,600 + Rs 2350 = Rs 5,950
Contribution to PF by April 1, 2020
Total EPF contribution in April = Rs 5,950
Interest on EPF in April = Nil (no interest in first month)
EPF account balance at the end of April = Rs 5,950
EPF contribution in May = Rs 5,950
EPF account balance at the end of May = Rs 11,900
Computation of interest per month = 8.50% / 12 = 0.007083%
Computation of interest on EPF of May = Rs 11,900 * 0.007083% = Rs 84.29
The interest rate for any financial year is notified by the government. Interest calculation is done at the end of the current financial year.
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