How is interest calculated on EPF contribution? What are tax rules? Know complete information

EPF interest rate for 2025

The government reviews the EPF interest rate from time to time. The EPF interest rate for FY 2024-25 has been fixed at 8.25%. This rate will be applicable to all EPF contribution from April 1, 2024 to March 31, 2025.

Interest is calculated on a monthly basis, but is deposited in the EPF account at the end of the financial year (31 March). This means that the entire year interest is added at the end of the year. The monthly interest rate is 0.688% (8.25% ÷ 12).

How is EPF interest calculated?

To calculate EPF interest you will need the following information:

• Employee age

• Current EPF balance

• Monthly original salary + dearness allowance (DA) (up to maximum ₹ 15,000)

• Contribution percentage

• retirement age

Example:

Suppose Rahul’s basic salary + DA = ₹ 30,000 per month. Their EPF interest will be calculated as follows:

• Rahul’s contribution (EPF):

12% × ₹ 30,000 = ₹ 3,600

• Company contribution to EPS (Pension Scheme):

8.33% × ₹ 15,000 = ₹ 1,250

• Company contribution to EPF:

₹ 3,600 (Rahul’s contribution) – ₹ 1,250 (EPS) = ₹ 2,350

• Total Monthly contribution (Rahul + Company):

₹ 3,600 ₹ 2,350 = ₹ 5,950

• Total balance after first month:

₹ 5,950

• Remaining in the second month:

₹ 5,950 + ₹ 5,950 = ₹ 11,900

• Interest:

0.688% × ₹ 11,900 = ₹ 81.87

Thus, the contribution and interest continues to grow every month and the interest of the entire year is added to the account in March. At the end of the year, the total contribution and interest amount will become Rahul’s EPF balance. The next year will begin with this balance.

What will happen if EPF contribution is closed?

If there is no contribution to an EPF account for 36 months continuously, then the account becomes inactive. Interest is not acquired on passive accounts.

• Employees contribution: Employees contribute to 12% EPF account of their basic salary + DA.

• Employer contribution: The employer also contributes 12% of the original salary + DA, of which 8.33% goes to the Employees Pension Scheme (EPS), and the remaining 3.67% is deposited in EPF.

• Additional contribution: Employees and employers can contribute more than 12% if they want, but additional contribution is not exempted from tax.

Tax Rules on EPF Interest

Taxes on EPF contribution and interest are as follows:

• Annual contribution of more than Rs 2.5 lakh: If the annual contribution of the employee is more than Rs 2.5 lakh, then the interest earned on the additional amount will be taxable.

• Contribution of up to Rs 2.5 lakh: Interest earned on this amount is tax-free.

• Inactive accounts: Interest earned on passive accounts is completely taxable.

• Benefits under Section 80C: Tax exemption up to Rs 1.5 lakh on EPF contribution is available under Section 80C.

• Contribution of more than 5 years: If you have contributed to EPF continuously for 5 years, there is no tax on partial withdrawal.

Benefits of EPF

• Financial security: It helps in making large amounts of money for retirement.

• Tax Benefits: Tax benefits are available on contribution, interest and withdrawal.

• Stable returns: EPF provides safe and stable returns as it is supported by the government.

If you are an EPF account holder, you can use the EPFO ​​website or Umang app to calculate your remaining amount and interest. It would be appropriate to seek the help of the financial advisor before taking tax and investment decisions.