The interest on EPF is calculated on the contributions from both employer and the employee. An employee contributes 12% of his/her basic salary with Dearness Allowance (DA). In case Basic Salary + DA is equal to or less than Rs. 15000, the contribution is 12% of basic salary + DA when employer will contribute 3.67% of Basic Pay +DA. The EPF balance is calculated on the basis of three methods if income is above Rs. 15000. An employer can use any of these methods. Well, the first method is most widely used. So, we are going to explain the first method to calculate the contribution from the employer and employee. Let’s take the following example to understand better –
This way, Rs. 1750 is the final EPF contribution of the employer. Along with the above methods, by using the formula in Method 1 – 12% of Basic Salary – 8.33% of 15000, we get Rs. 1750. After calculating the employee and employer contribution, it’s time to calculate the interest. It can be calculated on the opening balance every month. Interest on first month would be zero as opening balance is zero. For the next month, interest is calculated on the first month’s closing balance which is calculated by adding the contribution of both employee and employer for first month. At the same way, third month’s interest is calculated on second month’s closing balance. At the end of year, sum on both contributions is added to the sum of interest earned in all 12 months of the year. As a result you will get the annual closing EPF balance.
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May 2019
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