Are you curious about how your retirement savings are calculated? Look no further! In this blog, we’ll delve into the Employee Provident Fund (EPF), a retirement scheme designed to ensure sufficient funds for your retirement period. Regardless of whether you work in the private or government sector, you can take advantage of this scheme. Interestingly, nowadays, any company with a workforce exceeding 20 employees is required to sign up for the Provident Fund. Both employees and employers contribute to the fund, and in this article, we’ll explore how PF is calculated on your monthly salary. So, let’s demystify PF calculation and get a better understanding of how PF is calculated!
While the above components are included in PF calculation, there may be certain elements that are excluded, such as performance-based incentives, overtime pay, and reimbursements for medical expenses or travel allowances.
Note: The provided information is for general understanding, and it is always advisable to consult the specific rules and regulations governing PF calculation in your region or organization.
The Provident Fund contribution is divided into two categories.
Determining the amount of money be deposited into each employee’s Provident Fund (PF) account involves following certain rules. Typically, an employee’s PF account consists of two types of contributions:
During PF calculation in an employee’s salary, the employee contributes 12% of their basic salary and dearness allowance (DA) each month to the Provident Fund. Additionally, the employer matches the employee’s contribution by providing around 3.67% and 8.33% towards the Employee’s Provident Fund (EPF) and Employee Pension Scheme (EPS) respectively in the employee’s PF account.
Suppose an employee’s basic salary, along with dearness allowance, is ₹15,000. In this case, the employee’s Provident Fund contribution would amount to 12% of ₹15,000, which totals around ₹1,800. On the other hand, the employer’s contribution to the Employee Provident Fund would be 8.33% of ₹15,000, equivalent to approximately ₹1,250.
To calculate the employee’s contributions to the Employee Provident Fund, we subtract the employee’s contributions to the Employees’ Pension Scheme (EPS) from the employer’s contributions. In this scenario, the difference amounts to around ₹550.
Consequently, the monthly total contribution to the Employee Provident Fund becomes ₹1,800 + ₹550, resulting in ₹2,350.
Considering the rate of interest for the years 2022-2023 is 8.10%, the suitable monthly interest rate for calculating interest would be around 0.675% (8.10%/12).
Under certain circumstances, an employee may withdraw or accumulate a corpus from their PF account during their retirement period or while still working for the organization.
EPF contributions generate interest on a monthly basis using a simple calculation:
Interest = (Opening balance at the start of the year + Contributions made during the year) multiplied by the interest rate, divided by 12.
Let’s break it down:
The government determines the interest rate on EPF each year. As of the current financial year, 2022-23, the declared interest rate is 8.50%. At the end of each financial year, the interest earned is added to the EPF account.
It’s essential to note that the interest is computed based on the monthly balance of the EPF account, rather than solely relying on the annual contributions made by both the employee and employer. Consequently, the longer the funds remain invested in the EPF account, the greater the interest earned.
Understanding how PF is calculated is crucial for both employers and employees. With the right knowledge, you can make sure that all calculations are accurate and that there’s no confusion or dispute regarding an individual’s salary. The good news is that calculating PF is straightforward and can be done manually for small organizations. However, with the increasing complexities of modern businesses, it makes sense to use a PF calculator to ensure error-free computations. So why not try using a free online PF calculator today? It will save you time and make the process more efficient.