EPF interest is calculated on the Contributions made by the employee as well as the employer. Contribution made by the employee equals 12% of his/her Basic Pay plus Dearness Allowance (DA). When the Basic Pay plus DA is less than or equal to Rs 15000, the employee contribution is 12% of Basic Pay + DA whereas the employer contribution is 3.67% of the Basic Pay + DA.
There are 3 methods of computing the contributions if the income is above the threshold of Rs 15000.
Employee contribution
12 % of basic pay plus DA 12 % od Basic pay pay - 8.33 % of 15000
12 % of basic pay plus DA 3.67 % of 15000
12 % of 15000 3.67 % of 15000
we have used the 1st method for computing the employee and the employer contribution. Just to understand our methodology, let us take the following case:
1. Employees' Basic Pay + DA: Rs 25000
2. Employee contribution towards EPF: 12 % for 25000 = Rs 3000
3. Employer contribution towards EPF = 3.67 % of 25000 = 3.6 7% for 25000 = Rs 917.50
4. Employer contribution in Employee Pension Scheme (EPS): 8.33 % for 15000 = Rs 2082.50
5. Employer contribution in EPS on the thresh
6. Excess contribution of employer towards EPS above the threshold (II): Rs 2082.50 - Rs 1250 = Rs 832.50
7. The excess amount in (B) is added to the employer contribution towards EPF in (A) = 917.50 + 832.50 = RS 1750
Hence the final employer contribution towards EPF will be Rs 1750
In lieu of the above steps, if we use the formula used in Method 1 that is, 12% of Basic Pay -8.33% of 15000, we get 12 % 25000 - 8.33 % 15000 = 1750. Hence the 2 methods produce the same result.
Once the Contribution of the employee and the employer is computed, we compute 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 on 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.
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 = 57000 + 2351 = Rs 59351
As regards the withdrawal, one can withdraw the full EPF balance on attaining the age of 58 years. However, he can withdraw 90% of the EPF corpus on attaining the age of 57 years.
Consultancy in Bangalore | Placement & Consultancy Services in Bangalore