Navigating the maze that is personal finance

Saturday, 5 November 2016

How is the EPF interest calculated?

In my blog titled "What you need to know about the Employee Provident Fund – EPF“ I have shared the basics of EPF. So how is the interest calculated on your Employees' Provident Fund account?

Every year, the EPF interest rate is decided by the central government in consultation with The Central Board of Trustees (CBT). The interest rate for FY 15-16 was 8.8% per annum.  The table below gives information about the interest rates declared on PF accumulations for the last 10 years.



Financial Year

Interest Rate

2006-07

8.50%

2007-08

8.50%

2008-09

8.50%

2009-10

8.50%

2010-11

9.50%

2011-12

8.25%

2012-13

8.50%

2013-14

8.75%

2014-15

8.75%

2015-16

8.80%

You can find the interest rates declared by the CBT since 1952 here.

An important thing to note is that the EPF accounting year (financial year) starts in March and ends in February. The interest is credited to your account in April.  The interest is calculated at the end of the financial year on monthly running balances basis.

The opening balance for a new  fiscal year (March 1)  would be the opening balance for the previous fiscal + monthly contribution throughout the year + interest (on the opening balance for the previous fiscal year & contribution in that fiscal year).

The table below explains how the calculation is carried out.  In the example I have assumed that the opening balance for the year to be 100,000. The employee contribution per month is Rs. 3600 while the employer contribution is Rs. 1101. The interest rate for the year is 8.8%.



Month no.

Employee Contribution

Employer Contribution

Opening Balance

Interest Earned

1

3600.00

1,101.00

100,000.00

733.33
(100000*8.8%/12)

2

3600.00

1,101.00

104,701.00

767.81
((100000+3600+1101)*8.8%/12)


3

3600.00

1,101.00

109,402.00

802.28
((104,701+3600+1101)*8.8%/12)

4

3600.00

1,101.00

114,103.00

836.76
((109,402+3600+1101)*8.8%/12)


5

3600.00

1,101.00

118,804.00

871.23
((114,103+3600+1101)*8.8%/12)


6

3600.00

1,101.00

123,505.00

905.70
((118,804+3600+1101)*8.8%/12)


7

3600.00

1,101.00

128,206.00

940.18
((123,505+3600+1101)*8.8%/12)

8

3600.00

1,101.00

132,907.00

974.65
((128,206+3600+1101)*8.8%/12)

9

3600.00

1,101.00

137,608.00

1,009.13
((132,907+3600+1101)*8.8%/12)

10

3600.00

1,101.00

142,309.00

1,043.60
((137,608+3600+1101)*8.8%/12)

11

3600.00

1,101.00

147,010.00

1,078.07
((142,309+3600+1101)*8.8%/12)

12

3600.00

1,101.00

151,711.00

1,112.55
((147,010+3600+1101)*8.8%/12)

13

3600.00

1,101.00

167,487.28 (Balance at the beginning of the next financial year calculated as mentioned above)

1,112.55
((151,711+3600+1101)*8.8%/12)

I have built an excel calculator that will help you to arrive at these calculations. The EPF interest calculator in excel can be downloaded here.

Using the EPF calculator
 

Enter the following data in the PF calculator. Your current age, your retirement age, current rate of interest (provident fund), current EPF balance if any, the amount that you contribute to your EPF and  the amount contributed by your employer.




The calculator shows your final savings in the EPF summary section.


As with any calculator, there are certain assumptions I have taken in order to arrive at the final saving information. Do not forget to take advice of a certified financial planner prior to taking action on the data contained in file.
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