The Employees Provident Fund (EPF) is aimed to create a corpus for the employee after his retirement. It is accumulated by deducting the employee’s salary every month by 12% of the basic pay and dearness allowance. Moreover, even the employer contributes an equal amount which helps in creating a sufficient retirement corpus for the employee.

EPF contributions earn a fixed rate of interest and the interest is reviewed and determined by the EPFO (Employees Provident Fund Organisation). Currently, for the financial year 2018-19, the rate stands at 8.65% per annum. But do you know how the interest is calculated?

Calculation of interest on EPF

Though the interest rate is stated as a per annum rate, interest is calculated on the EPF account monthly. Every month, the balance in the EPF account is eligible for interest earnings. The interest earned in one month is then considered for next month’s interest calculation. Let’s understand –

Suppose EPF balance in March 2019 is INR 20,000. Interest for March would be calculated as follows –

20000*(0.0865/12) = INR 144.17

Thereafter, suppose INR 5000 is added as EPF contribution in April, interest for April would be calculated as follows –

(20000 + 144.17 + 5000) * (0.0865/12) = INR 181.25

So, interest would accumulate every month and the next month the accumulated interest would also earn interest. Though interest is calculated on the EPF balance every month, it is actually credited to the account annually.

This is how interest on EPF is calculated and paid. But what if your employer defaults on EPF contributions?

Damages on the late contribution of EPF

Employers are required to make an EPF contribution for a month by the 15^th of next month. This means that the contribution for March must be made by 15^th April. where you can check your contribution to EPF Passbook. If the employer defaults on making a contribution, an additional interest would have to be paid for such default. The interest would be payable at 12% per annum on a daily basis. So, if your employer delays the contributions, interest would be payable in addition to the contribution @ 12% per annum per day.

Besides the interest payable, there is also a penal charge which the employer would be required to pay. This charge is also expressed as a percentage and it depends on the delay in contribution. The charge structure is as follows

• If the delay is for up to 2 months – the penalty rate is applied at 5% per annum
• If the delay is for more than 2 months but less than 4 months – the penalty rate is applied at 10% per annum
• If the delay is for more than 4 months but less than 6 months – the penalty rate is applied at 15% per annum
• If a delay is for more than 6 months– the penalty rate is applied at 25% per annum which then goes up to become 100%

The penalty interest, therefore, goes on accumulating and the employer is required to pay a considerable amount of money to clear off the dues.

Additional – Income Tax Return Liabilities Possessed on EPF withdrawals

So, understand how EPF interest calculation is done so that you can understand how your money grows. Also, understand the penalties the employer is required to pay in case of a default to have complete knowledge of the EPF scheme.