Salaried individuals contribute a fixed amount each month towards the Employee Provident Fund and a matching contribution is made by the employer. The minimum monthly contribution is 12 per cent of the basic pay. However, a voluntary contribution up to 100 per cent of basic salary can be made by the employee. The employer need not match voluntary contributions and can stick to the 12 per cent contribution. Taking the employees’ and the employer’s contribution together, the interest amount gets credited to the PF account of the employee.
The interest rate is notified by the government for each financial year. For the FY 2021-22, the EPF interest rate is 8.1 per cent. The rules related to the calculation of Interest on Provident Fund Contributions are laid down under Para 60 of the Employees’ Provident Fund Scheme 1952.
In EPF, the interest is credited on the monthly running balance. Three things are important during calculation of PF interest amount – Opening balance, contributions during the year and any withdrawals during the year.
Interest for 12 months will be credited based on the closing balance of the amount as on the last date of the preceding year less any sum withdrawn during the current year.
If one has withdrawn any amount during the current year, then iInterest from the beginning of the year till the last date of the month preceding the month in which withdrawal took place will be credited.
On the PF contributions credited during the current year, the interest from the first date of month succeeding the month of credit, till the last date of the current year will get credited in the PF account.
Provident Fund Calculation Formula
Once the interest rate for any Financial Year is notified, and the current year ends, the month wise closing balance is calculated. Then the interest for the whole year is calculated by adding the monthly running balance and multiplying it with the interest rate / 1200.
Assuming interest rate of 8.65%, the amount of interest = 1104740* 8.65/1200= Rs 7963
Closing balance for the year will be: Opening balance + Contributions – withdrawal + Interest
= Rs 112345 + 1200 – 25000 + 7963 = Rs 96508
In case of a member taking the final settlement, the interest calculated is added in his settlement amount. Interest is separately calculated for the Employee Share and Employer Share of Provident Fund.
No interest is calculated on Pension Contribution towards the employees’ pension scheme since benefits are based on the service length and average wages at the time of exit, whether the benefit is through Pension or Withdrawal Benefit.
During final settlement, in case a member is taking a final settlement and the interest for the current year is not notified, interest is credited on the basis of the rate declared for the immediately preceding year. However on declaration of interest whether at less or higher rate no revision of the settled amount is done.