Computer Tips & Tricks: EPF Interest Rate 2018-19: How to Calculate Interest on EPF

EPF is expanded as Employees provident fund.In 1952 4th March government has passed The Employees Provident Fund Act with the object of ensure the employee better future on his retirement and of his dependents on his death.The organisation created for governing such rules is called EPFO,The Employees Provident Fund Organisation.

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 for specific purposes.

EPF Interest Rate

The Central Board of Trustees of the Employees' Provident Fund Organisation (EPFO) has recommended increasing the interest rate on Employees' Provident Fund for 2018-19 to 8.65% as against 8.55% in the preceding year. The move, once approved by the finance ministry will benefit six crore EPFO subscribers .

Labour minister Santosh Gangwar said the body has decided "to provide 8.65 per cent interest on PF deposits for 2018-19".

Link - Economics Time
Link - Times of India

EPF interest calculation

In the EPF scheme, you and your employer contribute every month. Your full 12% contribution goes to the EPF scheme. While the employer’s 8.33% contribution (maximum ₹1250) goes to the pension scheme. The remaining amount goes to the EPF scheme. The EPFO does not give any interest on the pension corpus. The interest is calculated on EPF corpus.

Since EPF contribution is given monthly, the interest is also calculated for every month’s contribution. Hence, the monthly interest rate is used to get the interest of each month. You can know the monthly interest rate by dividing annual interest by 12.

Every month, the interest is given on the opening balance of the EPF account. Thus, any contribution after the last day of the previous month would not become part of the opening balance. For example, if you contribute X amount on 2nd April, this X would not get any interest for the April month. The interest on x would be calculated in the next month.

The compounding of EPF interest happens at the end of every financial year. On 31st March of every year, the interest is included in the EPF balance. After this addition, you get the interest on interest.

Let us now understand how the interest is calculated on EPF deposits.

Let us consider the same EPF statement as the one given above. My friend had joined in his first job in a Private Limited company in April 2018. His company contributes 3.67% of his Basic salary as “EPF deposit” (Rs 239 pm) every month and 8.33% towards the EPS scheme (Rs 541 pm). (The 12% is subject to minimum of Rs 6,500 in 2018-19). His contribution was 12% of Rs 6,500 which was Rs 780 pm. ***Maximum Limit of PF Rs 15,000/- will deduct PF on that particular amount and some companies have their own policies.

Let me put all these figures in MS excel and calculate the total interest earned on EPF deposits from April 2018 to end of March 2019.

Let me now explain about the calculation part. In the month of April 2018 the interest amount was zero because the available EPF balance was zero in the month of March 2018.

In May 2018, Rs 7 was the interest earned for April's monthly contribution. We need to consider April month end balance (Rs 1019) and EPF applicable interest rate (it is 8.65% in 2018-2019) divided by 12 months (we are calculating monthly interest amount). We need to repeat these calculations till March 2018. The total accumulated interest was Rs 476 and was credited on 31/Mar/2018 (as shown in EPF statement).

The total interest amount of Rs 476 was added to April month’s balance, along with the monthly deposits. Even after the recent amendments to minimum contribution amount, the interest calculation procedure has not changed.

So, suggest you to try these calculations based on your monthly Provident Fund deposits and understand how is interest calculated on your Provident Fund Account.

EPF Historical Interest Rates

Year	EPF Interest Rates
1952 – 1955	3.00%
1955 – 1957	3.50%
1957 – 1963	4.00%
1963 – 1964	4.25%
1965 – 1966	4.50%
1966 – 1967	4.75%
1967 – 1968	5.00%
1968 – 1969	5.25%
1969 – 1970	5.50%
1970 – 1971	5.70%
1971 – 1972	5.80%
1972 – 1974	6.00%
1974 – 1975	6.50%
1975 – 1976	7.00%
1976 – 1977	7.50%
1977 – 1978	8.00%
1978 – 1979	8.25% + 0.5% bonus (for members who did not withdraw any amount from their PF during 1976-1977 & 1977-1978)
1979 – 1981	8.25%
1981 – 1982	8.50%
1982 – 1983	8.75%
1983 – 1984	9.15%
1984 – 1985	9.90%
1985 – 1986	10.15%
1986 – 1987	11.00%
1987 – 1988	11.50%
1988 – 1989	11.80%
1989 – 2000	12.00%
2000 – 2001	12% (April-June, 2001) and 11% (July, 2001 onwards) on monthly running balance
2001 – 2004	9.50%
2004 – 2005	9.50% (9% Interest + 0.5% Golden Jubilee bonus interest)
2005 – 2010	8.50%
2010 – 2011	9.50%
2011 – 2012	8.25%
2012 – 2013	8.50%
2013 – 2015	8.75%
2015 – 2016	8.80%
2016 – 2017	8.65%
2017 – 2018	8.55%

How to Calculate Interest on EPF

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:

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 2017-2018 is 8.55%.

When calculating interest, the interest applicable per month is = 8.55%/12 = 0.7125%

Assuming the employee joined a service on 1st April 2017, contributions start for the financial year 2017 – 2018 from April

Total EPF Contribution for April = ₹ 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 * 0.7125% = ₹ 33.49

The interest will be calculated every month but will be deposited only at the end of the financial year (on 31st March 2018 in this case).

Employer and Employee Contribution

A provident fund is created with a purpose of providing financial security and stability to employees. A person starts his contribution in the PF fund once he joins a company as an employee. The contributions are made on a regular basis. The primary purpose of PF fund is to help employees save a fraction of their salary every month so that he can use the same in an event that the employee is temporarily or no longer fit to work or at retirement.

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

Employers and employees both contribute @12% of wages in contribution accounts. Further, the employers also contribute towards administration of the benefits under the EPF & MP Act.

The rate of contribution for certain category of establishments is 10%. These are:-

Any establishment in which less than 20 employees are employed
Any sick industrial company and which has been declared as such by the Board for Industrial and Financial Reconstruction
Any establishment which has at the end of any financial year has accumulated losses equal to or exceeding its entire net worth, and
Any establishment in following industries:- Jute, Beedi, Brick, Coir and 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.

EPF Contribution Rate For Employee and Employer in 2018

Minimum 12% Contribution by Employee and Employer (In 2018)

You have to deposit a minimum amount to EPF account. It is 12% of your salary. You have to deposit this amount every month. Your employer deducts this amount before paying salary to you.

According to the EPF rule, your employer has to also match your EPF contribution. Thus, it has to also deposit 12% of your salary. This amount goes to your EPF and EPS account.

8.33% Goes to Pension Scheme

The employee pension scheme (EPS) runs along with the EPF scheme. A part of the EPF contribution goes to this scheme. Out of 12% employer’s contribution, 8.33% is routed to EPS. The remaining amount goes to EPF account.

There is an upper limit of the pension contribution. It can’t be more than ₹1250/month. This amount of ₹1250 is 8.33% of the 15,000. You may be aware that the EPF scheme is mandatory for the employee who earns ₹15,000 or less per month.

Summing Up

"The 12% of employee’s basic salary goes to the EPF scheme. The employer also contributes the same amount. From employer’s contribution, 8.63% goes towards the Employee Pension Scheme. The rest 3.33% goes to the EPF scheme. The employer’s contribution to the EPS is limited to ₹1250. The remaining amount is added to the EPF scheme."

Contribution for EDLI

When you become a member of EPF scheme, you also get the benefit of a life insurance cover. The EPFO provides the death cover to all of its active members. This scheme of life insurance cover is called as the Employee Deposit Linked Insurance Scheme.

This scheme also runs on contribution. The employers have to contribute to EDLI scheme for every employee. The contribution rate for EDLI is .01% of the employee’s salary. The employer has to deposit minimum ₹200 for EDLI scheme, in case its total EDLI contribution does not cross ₹200.

Because of this scheme, the family members of a deceased employee get ₹6 lakhs.

நீங்கள் EPF திட்டத்தின் உறுப்பினராகும்போது, ஆயுள் காப்பீட்டு அட்டையின் பயனும் கிடைக்கும். EPFO அதன் அனைத்து செயலதிகாரங்களுக்கும் மரண அறிவிப்பை வழங்கியுள்ளது. வாழ்நாள் காப்பீட்டின் இந்தத் திட்டம், பணியாளர் வைப்புத்தொகை இணைக்கப்பட்ட காப்பீடு திட்டமாக அழைக்கப்படுகிறது.

இந்த திட்டம் பங்களிப்புடன் இயங்குகிறது. ஒவ்வொரு பணியாளருக்கும் EDLI திட்டத்தில் முதலாளிகள் பங்களிக்க வேண்டும். EDLI க்கு பங்களிப்பு வீதம் ஊழியர் சம்பளத்தின் .01% ஆகும். EDLI திட்டத்தின் மொத்த EDLI பங்களிப்பு ₹ 200 ஐ கடக்காதபட்சத்தில், EDLI திட்டத்திற்காக குறைந்தபட்சம் ₹ 200 ஐ செலுத்த வேண்டும்.

இந்த திட்டத்தின் காரணமாக, இறந்த ஊழியரின் குடும்ப உறுப்பினர்கள் ₹ 6 லட்சம் பெறுகின்றனர்.

Administrative Expense By Employer

Besides the 12% contribution, an employer has to also contribute for administrative expenses of EPFO. The rate for the administrative expense is 0.85% of the employee salary. Before 2015, it was 1.10%.

Earlier this rate was much higher. But now, because of the online operations, the EPFO could reduce its expense. Therefore, the employers have got the respite.

However, an employer has to deposit minimum ₹500/month as the administrative expense. If the establishment has no contributory member in the month, the minimum administrative
charge will be ₹75.

In case of Establishment is exempted under PF Scheme, Inspection charges @0.18%, minimum ₹5/- is payable in place of Admin charges.

Important Points Related to EPF Contributions

The contribution made by the employee goes totally towards the provident fund of the employee.
The contribution made by the employer is divided into different parts.
Total contribution made by the employer is distributed as 8.33% towards Employees’ Pension Scheme and 3.67% towards Employees’ Provident Fund.
Apart from the above-made contributions, an additional 0.5% towards EDLI has to be paid by the employer.
Certain administration costs towards EDLI and EPF standing at the rate of 1.1% and 0.01% respectively also have to be incurred by the employer.
This means that the employer has to contribute a total of 13.61% of the salary towards this scheme.

Important Points to Consider

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!

Accounts Entry:-

Dr Salary 12,000

Cr Salary Payable 9,600.00

Cr PF Employee Contbn. 2,400.00

(being Salary Payable for the month of May 2012).

Dr Salary Payable 9,600.00

Cr Bank 9,600.00

(being Salary Paid for the month of May 2012)

Dr PF Employee Contbn. 2,400.00

Dr PF Employer Contbn. 2,600.00

Cr Bank 5,000.00

(Being the PF Amount Paid for the month of May 2012)

II. Illustration

Calculation of EPF

Employee is required to contribute 12% of “PF salary” while the employer is required to contribute 13% of “PF salary” towards Employees’ Provident Fund where “PF salary” consists of Basic + DA (including the cash value of any food concession) and retaining allowance Employer’s contribution of 13% is distributed in four different accounts i.e. EPF, Pension Scheme, Employee Deposit Linked Insurance and EPF Administration charges in following manner:

Suppose an employee earns salary of Rs 16000 comprising of:

Basic Salary – Rs 10000
Dearness Allowance – Rs 2000
HRA – Rs 4000

Since his total of Basic salary and DA is less than Rs 15000, he is covered within the ceiling limit. Calculate EPF contributions and write journal entries.

Solution

Employer’s contribution:-
EPF @ 3.67% - Rs 440
EPS @ 8.33% - Rs 1000
EDLI @ 0.50% - Rs 60
EPF Admin charges @ 0.50% - Rs 60
Total Rs 1560
Employee’s contribution to EPF @ 12% = Rs 1440
So total contribution made is Rs 1440 + Rs 1560 = Rs 3000

Dr Salary 16000
Cr Bank (Salary payable) 14560
Cr Employee’s contribution to EPF 1440

Dr Employee’s contribution to EPF 1440
Dr Employer’s contribution to EPF 440
Dr Employer’s contribution to EPS 1000
Dr EPF Administration charges 60
Dr Employer’s contribution to EDLI 60
Cr Bank (PF Payable) 3000

Journal entry for provident Fund

In this article we would discuss the journal entry for provident fund contribution. There are two types of contribution in provident fund i.e. employer contribution and employee contribution.

Employer Contribution Journal Entry

Employer contribution is expense for the business. Thus expense is recorded, while provident fund is liability towards the employee, thus a liability is created for employees. For example the journal entry for the provident contribution shall be recorded as under;

Date	Particulars	Dr	Cr
	Provident fund contribution A/c	100,000
	Provident fund payable		100,000

Employee contribution Journal Entry

The provident fund contribution is normally deducted from the salary. Thus the following entry is recorded in the book to create a liability of provident fund. The salary is paid net off provident fund liability.

Date	Particulars	Dr	Cr
	Salary A/c	100,000
	Provident fund payable		10,000
	Cash		90,000

Fund transfer Journal Entry

We can see that there are two liability created (employer contribution and employee contribution). The total amount is transferred from operation account to provident fund account. The provident fund account cannot be used in business.