EPF interest rate cut to 8.1%: Guide to calculating PF and interest earned

The EPFO decides the rate of interest for the EPF scheme on a yearly basis. The rate of interest is dependent on the market conditions and is vetted by the finance ministry. Here's how to calculate it

Interest rate on employees' provident fund deposits last week was cut to a four-decade low of 8.1 per cent for the 2021-22 financial year, from 8.5 per cent in the previous year.

The last time the EPF savings were paid an annual return this low was in 1977-78, when the rate was 8%. That marked the highest EPF rate at the time since the EPFO’s inception in 1952. Since then, the EPF rate has only been lower than 8.5% in three years — 1979-80, 1980-81 and 2011-12 — when an 8.25% return was paid on balances.

The EPFO paid 8.5% interest rate to its subscribers in 2020-21, the same as in the previous year. The EPF rate was 8.65% in 2018-19 and 8.55% in 2017-18. In 2016-17, the EPF interest rate was at 8.65%.

The cut in the EPF rate come at a time when inflation is resurging. India’s retail inflation rate inched up to an eight-month high in February, remaining above the upper limit of the RBI’s comfort level of 6 per cent for the second consecutive month, while the wholesale price inflation rate remained in double digits for the eleventh consecutive month. 

EPFO's income from investments

The EPFO’s income from investments this year stood at Rs 76,768 crore from about Rs 70,000 crore in 2020-21, when it had paid out 8.5% to EPF accounts. The EPF corpus went up during the year from Rs 8.29 lakh trillion to Rs 9.42 trillion.

What is EPFO

The EPFO is the country’s largest retirement fund and the second largest non–banking financial institution with a corpus of about Rs 16 trillion. It has 247.7 million members with EPF accounts, of which 143.6 million members were allotted Unique Account Numbers (UANs) as of March 31, 2020. About 5o million members are active contributors with fresh accretions made into their EPF accounts during 2019–20.

The EPF accounts are mandatory for employees earning up to Rs 15,000 a month in firms with over 20 workers, with 12% of the basic pay and dearness allowance deducted as employees’ contribution and another 12% remitted by the employer. Part of this cumulative 24% contribution is remitted to the Employees’ Pension Scheme of 1995.

Pointers

— Employer and employee make contributions

— Wage ceiling is Rs 15,000
— Mandatory for organisations with over 20 employees

How is the EPF interest rate decided?

The EPFO decides the rate of interest for the EPF scheme on a yearly basis. The rate of interest is dependent on the market conditions and is vetted by the finance ministry. 

How is EPF interest rate calculated?

The interest rate can be calculated either by using the step method or the formula method. The rate of interest for the FY 2021-2022 is 8.1. Here's how to calculate EPF

EPF Basic salary and dearness allowance: Rs 15,000

Employee’s contribution towards EPF (12% of Rs 15,000): Rs 1,800.

Employer’s contribution towards EPF (on the threshold income of Rs 15,000: Rs 1,249.5

Employer’s contribution towards EPS (1,800-1,250): Rs 550

Total EPF contribution every month: Rs 2,350

The current rate of interst is 8.1%

When calculating interest, the interest applicable per month is = 8.10%/12 = 0.675%.

Assuming the employee joined service on 1st April 2021, contributions start for the financial year 2021 – 2022 from April.

Total EPF Contribution for April = Rs 2,350
 

Interest on the EPF contribution for April = Nil (no interest for the first month)
 

EPF account balance at the end of April = Rs 2,350
 

EPF Contribution for May = Rs 2,350
 

Total EPF contribution for May = Rs 4,700
 

Interest on the EPF contribution for May = Rs 4,700 * 0.675% = Rs 31.725

*The interest will be calculated every month but will be deposited only at the end of the financial year.