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    How to calculate Employees' Provident Fund balance and interest

    Synopsis

    To calculate the Employees' Provident Fund interest, one must first calculate his contribution and his employer's contribution to the fund.

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    Once the Contribution of the employee and the employer is computed, we compute the interest on the contribution.
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    Interest on the Employees' Provident Fund (EPF) is calculated on the contributions made by the employee as well as the employer. Contributions made by the employee and the employer equals 12% or 10% (includes EPS and EDLI) of his/her basic pay plus dearness allowance (DA).

    A 10% rate is applicable in the case of establishments with less than 20 employees, sick units or units that meet certain conditions as prescribed by the Employees' Provident Fund Organisation (EPFO).

    To incentivise women employment in the formal sector and augment their take home salary, the Government of India in Budget 2018, reduced women employees' contribution to 8% for the first 3 years of their employment as against the current 12% or 10% depending on the type of establishment. The employer contribution will, however, remain at 12%/10%.

    What's more, for new employees coming under the ambit of EPFO, the employer will not be required to make any contributions. Instead, the Government will make the employer contribution of 12% (EPF and EPS both) for the first three years of employment. The terminal date of registration of beneficiary through an establishment is March 31, 2019. EPF Contribution for employees who have joined on or after 1st April 2016 with a salary up to Rs 15000 per month will also be covered under this scheme.

    Break up of the Contribution Rate
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    *For women employees for the first 3 years of employment

    The Contributions are made on a wage ceiling (Basic Salary + DA) of Rs 15,000. However, when the current income exceeds the wage ceiling, three standard methods are employed for calculating the contribution amount. The employer is free to use any one of the methods.
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    To understand methodology employed in the ET EPF Calculator, let us take the following case:
    1. Employees' Basic Pay + DA: Rs 50000
    2. Employee contribution towards EPF: 12%*50000 = Rs 6000
    3. Employer contribution towards EPF = 3.67% of 50000 = 3.67%*50000 = Rs 1835…. (A)
    4. Employer contribution in Employee Pension Scheme (EPS): 8.33% * 50000 = Rs 4165 …. (I)
    5. Employer contribution in EPS on the threshold income of Rs 15000: 8.33% of 15000 = Rs 1249.50 …. (II)
    6. Excess contribution of employer towards EPS above the threshold (I) - (II): Rs 4165 - Rs 1249.50 = Rs 2915.50 …. (B)
    7. The excess amount in (B) is added to the employer contribution towards EPF in (A) = 2915.50+ 1835 = Rs 4750.50

    Hence, the final employer contribution towards EPF will be Rs 4,750 (the result is rounded off to the nearest decimal place as stipulated by EPFO).

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    In lieu of the above steps, if we use the formula used in Method 1 that is, 12% of Basic Pay (plus DA) -8.33% of 15000, we get 12%*50000 - 8.33%*15000 = 4750.50. Rounding off to the nearest decimal place, the figure comes to Rs 4,750. Therefore, the step method and the formula based method yield the same result.

    Once the Contributions of the employee and the employer are computed, we calculate the Interest on the contribution. The interest is computed on the opening balance of each month. As the opening balance for the first month is zero, the interest earned on the 1st month is zero. For the second month, interest is computed on the closing balance of the 1st month which is the same as the opening balance of the second month. The closing balance of the 1st month is calculated by adding the employee's and the employer's contribution for the 1st month. Similarly, the interest for the 3rd month is computed on the closing balance of the 2nd month. The closing balance of the 2nd month is calculated by adding the closing balance of the 1st month and the employee as well as the employer contribution in the 2nd month.

    The sum of the employee as well as the employer contribution at the end of the year is added to the sum of the interest earned in each of the 12 months of the year. The result so obtained is the closing EPF balance at the end of the year. This amount becomes the opening balance for the 2nd year. The interest in the 1st month of the 2nd year is computed on the opening balance of the 2nd year.

    Illustration (Interest rate on EPF is 8.55%)
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    Total EPF balance at the end of the year = Balance at the end of 12 month (Employee plus the Employer contribution) + Sum of the interest earned in each month in the year = 1,29,000 + 5055 = Rs 1,34,055

    Total EPF balance at the end of the year = Balance at the end of 12 month (Employee plus the Employer contribution) + Sum of the interest earned in each month in the year = 1,29,000 + 5055 = Rs 1,34,055

    As regards the withdrawal, one can withdraw the full EPF balance on attaining the age of 58 years or if the beneficiary remains unemployed for a continuous period of 2 months or more. The EPFO has, however, stipulated conditional withdrawal upto 90% commensurate with circumstances prescribed by EPFO. The only sweetener is that the beneficiary can withdraw 90% of the EPF corpus on attaining the age of 57 years without any conditions.

    As far as the tax implications are concerned, EPF withdrawals attract zero tax if the withdrawal is done after 5 years of continuous employment. If the withdrawal takes place before 5 years, the amount so withdrawn is added to the taxable income and taxed as per the marginal rates of tax.

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    2 Comments on this Story

    Kagiso Augustine Mosesane131 days ago
    How much do I qualify for if I was earning 7100 before deduction for 6 months 6500 after deduction
    Suresh294 days ago
    Very good explanation on PF.
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