How to calculate Employees' Provident Fund balance and interest



How to calculate Employees' Provident Fund balance and interest

CHANGE OF WAGE LIMIT {Sec 2(f) OF EPF SCHEME 1952}
Period Wage limit per month
01.11.1952 to 31.05.1957 Rs. 300/-
01.06.1957 to 30.12.1962 Rs. 500/-
31.12.1962 to 10.12.1976 Rs. 1,000/-
11.12.1976 to 31.08.1985 Rs. 1,600/-
01.09.1985 to 31.10.1990 Rs. 2,500/-
01.11.1990 to 30.09.1994 Rs. 3,500/-
01.10.1994 to 31.05.2001 Rs. 5,000/-
01.06.2001 to 31.08.2014 Rs. 6,500/-
01.09.2014 onwards Rs. 15,000/-

Employee Provident fund 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.

Note:(12% Employer contribution will be divided into 2 parts i.e. 8.33% towards Employees pension scheme and rest 3.67% towards Provident fund)

Typically, Employer Contribution is divided as follows:

  • 3.67% into Employee Provident fund
  • 8.33% into Employees pension scheme
  • 0.5% into Employees’ Deposit Linked Insurance Scheme (EDLIS)
  • 0.01% towards EDLIS Administrative Charges

If the employee income is below or equal to 15,000/- (Compulsory)

  1. Employees' Basic Pay + DA: Rs 15000.
  2. Employee contribution towards EPF: 12% x 15000 = Rs.1,800/-
  3. As per the Act -12% Employer contribution will be divided into 2 parts i.e. 8.33% towards Employees pension scheme and rest 3.67% towards Employee Provident fund.
  4. But employer contribution towards provident fund is Rs.15,000 x 3.67% = Rs.550.5/- 
  5. Remaining 8.33% towards Employee pension scheme (EPS) that is 15,000/-x 8.33% = Rs.1249.5/-.


If the employee income is above 15,000/- (Exempted but Voluntary)

There are 3 methods of computing the contributions if the income is above the threshold of Rs 15000. Any one of these methods can be adopted by an employer. The most commonly used is the first method.

Methods

Employee PF Contribution

Employer PF Contribution

1

12% of Basic Pay plus DA

12% of Basic pay - 8.33% of 15000

2

12% of Basic Pay plus DA

3.67% of 15000

3

12% of 15000

3.67% of 15000

In the EPF calculator, 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% x 25000 = Rs 3000
  3. As per the Act -12% Employer contribution will be divided into 2 parts i.e. 8.33% towards Employees pension scheme and rest 3.67% towards Employee Provident fund.
  4. Employer contribution towards provident fund @12% on Rs.25,000/- = Rs. 3000/-
  5. But employer contribution towards Employee pension scheme (EPS) is calculated on Rs. 15,000/- only i.e. @ 8.33% = 1250/- (rounding off). 
  6. Rest of the provident fund amount Rs.3000 - 1250 = 1750 is paid  towards employees provident fund.

Hence the final employer contribution towards Employee Provident fund will be Rs 1750

EPF Calculator

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% x 25000 - 8.33% x 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 as the employer contribution of the 2nd month.

The sum of the employee as well as the employer contribution at the end of the year is added to the sum of the interest earned in each of the 12 months of the year. The result so obtained is the closing EPF balance at the end of the year.

This amount becomes the opening balance for the 2nd year. The interest in the 1st month of the 2nd year is computed on the opening balance of the 2nd year.

Illustration: (Assuming 9% rate of interest on EPF)


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.

 

Things you must be aware about EPF scheme and how to calculate the PF balance

Employees Provident Fund Scheme (EPF) is the main scheme under The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. It is managed under the aegis of Employees' Provident Fund Organisation (EPFO). It covers every establishment in which 20 or more persons are employed and certain organisations are covered, subject to certain conditions and exemptions even if they employ less than 20 persons each.

Under EPF scheme, an employee has to pay a certain contribution towards the scheme and an equal contribution is paid by the employer. The employee gets a lump sum amount including self and employer’s contribution with interest on both, on retirement.

As per the rules, in EPF, employee whose ‘pay’ is more than Rs. 15,000 per month at the time of joining, is not eligible and is called non-eligible employee. Employees drawing less than Rs 15000 per month have to mandatorily become members of the EPF. However, an employee who is drawing ‘pay’ above prescribed limit (at present Rs 15,000) can become a member with permission of Assistant PF Commissioner, if he and his employer agree.

Contribution by employer and employee
The contribution paid by the employer is 12% of basic wages plus dearness allowance plus retaining allowance. An equal contribution is payable by the employee also. In the case of establishments which employ less than 20 employees or meet certain other conditions, as per the EPFO rules, the contribution rate for both employee and the employer is limited to 10 percent.

For most employees of the private sector, it’s the basic salary on which the contribution is calculated. For example, if the monthly basic salary is Rs 30,000, the employee contribution towards his or her EPF would be Rs 3,600 a month ( 12 percent of basic pay) while the equal amount is contributed by the employer each month.

It should, however, be noted that not all of the employer’s share moves into the EPF kitty. Out of employer’s contribution, 8.33% will be diverted to Employees’ Pension Scheme, but it is calculated on Rs 15,000. So, for every employee with basic pay equal to Rs 15,000 or more, the diversion is Rs 1,250 each month into EPS. If the basic pay is less than Rs 15000 then 8.33% of that full amount will go into EPS.  The balance will be retained in the EPF scheme. On retirement, the employee will get his full share plus the balance of Employer’s share retained to his credit in EPF account.

Higher voluntary contribution by employee or Voluntary Provident Fund
The employee can voluntarily pay higher contribution above the statutory rate of 12 percent of basic pay. This is called contribution towards Voluntary Provident Fund (VPF) which is accounted for separately. This VPF also earns tax-free interest. However, the employer does not have to match such voluntary contribution.

Withdrawals from the EPF account
According to the EPF Act, for claiming final PF settlement, one has to retire from service after attaining 55 years of age. The total EPF balance includes the employee’s contribution and that of the employer, along with the accrued interest.

There is, however, a window to partially withdraw the amount for those nearing retirement. Anyone over 54 can withdraw up to 90 percent of the accumulated balance with interest. But what if someone decides to quit his job before reaching 55? Under the existing rule, the employees, in such cases, can withdraw the full PF balance if he is out of employment for 60 straight days or more.

There was a proposal which restricted employee access to a part of the funds, allowing for the withdrawal of the employer contribution only after attaining the age of 58 years, which stands in abeyance as of now.

To withdraw money, one may now use ‘UAN based Form 19’ and in effect bypass the employer signature requirement. This facility will be available to all those subscribers whose UAN is activated and seeded with the KYC details like bank account and Aadhaar number. Currently, the form has to be submitted offline, but the EPFO is expected to extend this facility online too.

Interest on account
The Interest in EPF is calculated on the basis of monthly running balance.

Universal Account Number
UAN stands for Universal Account Number to be allotted by EPFO. The UAN will act as an umbrella for the multiple Member IDs allotted to an individual by different establishments. The idea is to link multiple Member Identification Numbers (Member Id) allotted to a single member under single Universal Account Number.

UAN will help the member to view details of all the Member Identification Numbers (Member Id) linked to it. If a member is already allotted (UAN then he/she is required to provide the same on joining new establishment to enable the employer to in-turn mark the new allotted Member Identification Number (Member Id) to the already allotted Universal Identification Number (UAN).

UAN has been made mandatory for all employees and will help in managing the EPF account and even PF transfer and withdrawals will become much easier than before. Remember, in most cases, the employer provides the UAN and the employee just has to get it activated by providing relevant KYC documents to the employer. So if you are changing jobs and already have a UAN, you need not get a new UAN from your new employer. It is a one-time permanent number which will remain the same throughout one’s career.

When you join a new organisation, the first thing you should do is ask your employer for the ‘New Form No. 11- Declaration Form’ to furnish the existing UAN. If you don’t have one, then just give your previous PF number along with the date of exit from your previous job.

How to activate Universal Account Number?

The Employees Provident Fund Organisation (EPFO) has introduced the Universal Account Number (UAN) for members. The number allows portability of PF accounts from one employer to another without depending on any employer for withdrawal of EPF balance. The number allows a member to view all his or her EPF accounts with current and former employers. With the number, a member can initiate the process of closing old accounts and transferring balances. The number, which has to be allotted by an employer, needs to be activated.

Get UAN from employer

Former employer will provide UAN and member ID to the current employer. These details are mandatory for UAN activation.

Website

The EPFO member needs to visit the EPFO website at the following address: https://uanmembers.epfoservices.in/. Click on the “Activate your UAN based registration” tab. On clicking, one can read the instructions and click on “I have read and understood the instructions”.

Information

The member is then asked to enter his UAN and mobile number. Next, the state and PF office needs to be selected from the dropdown option. Member ID also needs to be entered in the form. After entering these details, the member can click on “Get PIN”.

Authorisation

A PIN is sent to the mobile number registered. This number needs to be entered and submitted to complete the activation process.

User id and password

On completion of the activation, the member will be prompted to create a login user id and password for accessing the UAN services offered by the portal.

Points to note

* One can access the User Manual on the activation page of the website which provides information on activation and further use of the portal.

* The member can access the EPF passbook and download the UAN card once registration is completed by using the login credentials .

The importance of five years of continuous service
Typically, in early and mid-years of their careers, employees tend to switch jobs. After leaving, they have two options with regard to their EPF. Either they can withdraw it after waiting for 60 days (if unemployed) or transfer the balance to the new employer.

The EPF withdrawal is not taxable if one has completed at least five years of continuous service. If one has switched jobs in less than five years but transferred the EPF to the new employer, it will be counted as continuous service. Someone, for instance, works for 1.5 years and then joins another organisation. He transfers his PF balance on to the new employer where he continues to work for 3.5 years. Taken together, it will be five continuous years of service for the employee. It is, therefore, better to transfer your existing PF to your new employer.

Tax on early withdrawals
Withdrawing the PF balance without completing five continuous years of service has tax implications. The total employer’s contribution amount along with the interest earned will get taxable in the year of withdrawal. Also, the amount of deduction claimed under Section 80C on one’s own contribution will be added to one’s income in the year of withdrawal. In addition, the interest earned on one’s own contribution will also be subject to tax.

The government had introduced Tax Deducted at Source (TDS) on PF withdrawals in order to discourage premature withdrawals and promote long-term savings. No tax is deducted if the employee withdraws PF after five years. Also, TDS shall not be applicable in case of PF transfer from one account to another. From June 1, 2016, for TDS, the threshold limit of PF withdrawal has been raised from Rs 30,000 to Rs 50,000. TDS will be applicable at the rate of 10 per cent provided PAN card is submitted.

Employees' Provident Fund Advances
Contributions towards Employees' Provident Fund (EPF) are meant to take care of one’s post-retirement needs. But you don’t have to wait till you retire to lay your hands on it. The EPFO allows one to access one’s EPF even during the course of employment. Such withdrawals are treated as ‘advances’ and not loans.

Such advances are allowed only under specific situations – buying a house, repaying a home loan, medical needs, education or marriage of children, etc. Also, the amount that you can take as an advance will depend on the specific situation, the number of years of service, etc. As it’s not a loan, one need not pay any interest on such advances. Unlike a loan, it is not necessary to repay the advance.

Availing advances
If you have your Know Your Customer (KYC) compliant Universal Account Number (UAN), which is activated and seeded to your bank account, you don’t have to even go through your employer to get hold of your EPF. The UAN Based Form 31 (New) can be directly submitted to the EPFO. Else, you may fill in Form 31 and submit it to the EPFO through your employer.

The employee can take the advance for buying or building a house or buying a plot of land and even for construction of a house on a plot owned by the member. The advance can also be taken for repayment of the outstanding home loan, for self or family member’s medical treatment, for the marriage of self/daughter/son/ brother/sister or for post matriculation education of son/daughter.

The employee can take the advance for buying or building a house or buying a plot of land and even for construction of a house on a plot owned by the member. The advance can also be taken for repayment of the outstanding home loan, for self or family member’s medical treatment, for the marriage of self/daughter/son/ brother/sister or for post matriculation education of son/daughter.


Provident fund withdrawals from EPFO

In the latest circular dated April 13, 2018, field offices have been instructed to send the claim forms online to the employers for further verification for those claim forms that are received online from the claimants. This step has been taken to minimise the risk of fraud and step up security. EPFO, this year in February, has made mandatory submission of claims of PF and EPS withdrawals via online mode only. In that earlier circular, it instructed that all claims above the stipulated limits will not be accepted in the physical forms.

Reversing its earlier decision, the EPFO has decided to accept provident fund withdrawal claims of over Rs 10 lakh via physical forms submitted offline. In a earlier circular the EPFO had issued instructions to its offices to allow submission of PF claims of over Rs 10 lakh only online.

Employees Provident Fund Organisation (EPFO) in its circular dated 13 April, 2018 has revised instructions to settle claims for Provident Funds (PF) and Employees' Pension Scheme (EPS) withdrawals. According to the circular, all the PF claims above Rs 10 lakh now will also be settled via offline submission of forms. This will also hold for EPS withdrawals settlement above Rs 5 lakh.

The decision has been taken considering the problems faced by the members/claimants including the international workers while submitting their claims online. Due to the grievances raised by members, this stipulation will be kept in abeyance so that so that offline claims will also be accepted in all cases, EPFO said in its circular.

Conclusion
Currently (2016-17), the EPF interest rate stands at 8.65 percent. In terms of returns from a debt instrument, EPF certainly stands tall. The money is sovereign-backed and the interest earned is tax-free. In fact, it enjoys the Exempt, Exempt, Exempt (EEE) status as contributions are deductible from income. There is hardly any debt product that gives such high return with safety and assurance. Therefore, it’s better to transfer your PF account when you switch jobs and avoid the temptation to withdraw the amount.