Provident Fund (PF) Account is a good savings option. The EPFO manages the accounts of crores of account holders. In these accounts, 24 per cent of the basic and dearness allowance of both the employee and the employer is deposited. Every year the government fixes interest on the amount deposited in this EPF account. But, do you know how EPF is calculated?
Generally, account holders assume that interest is earned on the entire money deposited in the Provident Fund. However, it doesn't work that way. No interest is calculated on the amount that goes to the pension fund in the PF account.
In your salary slip, you can see your basic salary and DA. Every employee's basic salary plus 12% of DA goes to the EPF account. The company also contributes 12 percent of the basic salary + DA. Interest is earned on the money collected by combining both the funds. The interest is reviewed every year, but the advantage of this is that having compounding interest also gives double benefit in interest.
If you are wondering how much PF you will have in your account at the time of retirement, here is the calculation.
- Age of EPF member: 25 years
- Retirement age: 58 years
- Basic salary: Rs 10,000
- Interest Rate 8.65%
- Salary increase by 10% (annually)
- Total fund: Rs 1.48 crore
How much will be your PF on 15,000 basic salary?
- Age of EPF member: 25 years
- Retirement age: 58 years
- Basic salary: Rs 15000
- Interest Rate 8.65%
- Salary increase by 10% (annually)
- Total fund: Rs 2.32 crore
How to calculate interest on PF
Interest is calculated on the basis of the monthly running balance deposited in the PF account every month. But, it is deposited at the end of the year. According to the rules of EPFO, if any amount is withdrawn in a year from the balance amount on the last date of the current financial year, then the interest for 12 months is calculated after deducting it. EPFO always takes the opening and closing balance of the account. To calculate this, the monthly running balance is combined and multiplied by the rate of interest/1200.
If any amount is withdrawn during the current financial year, the amount of interest is taken from the beginning of the year to the month immediately preceding the withdrawal. The year's closing balance will be its opening balance + contribution-withdrawal (if any) + interest.
(With inputs from Zee Business)
