Kolkata: Employee’s Provident Fund or EPF is one of the most significant instruments for the creation of a completely safe post-retirement corpus in India. The formula that is employed for determining the corpus for an employee at his/her retirement is dependent on a few factors. These are: basic salary of the employee, rate of annual salary hike that the employee gets and rate of interest that is applicable on the corpus. This rate of interest is determined separately every year.
For the second year running, the EPFO (Employee’s Provident Fund Organisation) has declared an interest rate of 8.25% for FY25, which is relatively high. The rate was 8.25% in FY24, while it was 8.15% in FY23. The announcement of 8.25% rate is significant for crores of EPFO subscribers since it helps raise the corpus significantly. But how does the impact of the rate of interest work out? Let’s check with examples.
The calculation with varying interest rate
Let’s take the case of an employee who begins working at a basic salary of Rs 20,000. This individual gets an average salary hike of 5% every year. Let this person start working at the age of 25 years and retire at the age of 58. Let’s assume the average rate of interest applicable each year on accumulated funds at 8.1%, the lowest rate of interest paid by EPFO in this century. An online EPF calculator will show that this person will get a one-time corpus of Rs 1,32,25,500 or more than Rs 1.32 crore.
Now assume another scenario where another person of the same age start working life at the same salary. He/she gets the same average wage hike and retires at the same age. The average rate of interest EPFO pays him/her is 8.25%. In this case, the final amount works out to be Rs 1,35,68,643 or Rs 1.35 crore, which is about Rs 3.5 lakh more than the first instance. Therefore, the announcement of 8.25% is a reason for EPFO subscribers to be happy.
Does the rate of interest impact EPS?
However, one thing is to be kept in mind. The pension fund that is maintained by the EPFO is not impacted by the rate of interest announced by the EPFO. The EPS is a separate scheme within the EPFO. Its calculations are not linked to the interest applicable to the EPF.
Does EPF interest rate change
The rate of interest applicable on the accumulated EPF corpus is set every year and EPFO declares the rate of interest. The first year when the rate was declared was in FY53, when the scheme was legislated. It was a meagre 3%. It rose progressively and the first time it went up to 8% was in FY78. In FY86, it touched 10.15%, breaching the double digits for the first time. It cam back to the single-digit range in FY02 when it climbed down to 9.5%. IN this decade the rates were: FY21 – 8.5%, FY22, 8.1%, FY23 8.15%, FY24 8.25% and FY25 8.25%.
The Employee’s Provident Fund or EPF is one of the most significant instruments for the creation of a completely safe post-retirement corpus. The EPFO has announced an interest rate of 8.25% for FY25, the second successive year. See the impact of interest rate on EPF corpus. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
