How PF interest is calculated?

How PF interest is calculated?

The rules related to the calculation of Interest on Provident Fund Contributions are laid down under Para 60 of the Employees’ Provident Fund Scheme 1952 
The interest is credited on monthly running balance basis as follows:

 On the closing balance of the amount as on last date of the preceding year less any sum withdrawn during the current year: 
interest for 12 months.
 On the sums withdrawn during the current year: Interest from the beginning of the year till the last date of the month 
preceding the month in which withdrawal took place.
 On the amounts of contributions credited during the current year: interest from the first date of month succeeding the month  of credit, till the last date of the current year.

Once the interest rate for any Financial Year is notified, and the current year ends, the month wise closing balance is calculated and then the interest for the whole year is calculated by adding the 
monthly running balance and multiplying it with the interest rate /1200. (See illustration)

In case of a member taking the final settlement, the interest calculated as per this rule is added in his settlement amount.

Note: Interest is separately calculated for the Employee Share and Employer Share of Provident Fund. No interest is calculated on Pension Contribution since benefits are based on the service length and average wages at the time of exit, whether the benefit is through Pension or Withdrawal Benefit.

During final settlement:
In case a member is taking a final settlement and the interest for the current year is not notified, interest is credited on the basis of the rate declared for the immediately preceding year. However on declaration of interest whether at less or higher rate no revision of the settled amount is done. 

Interest in the Inoperative Accounts:
No interest is credited in the members’ account from the date when the account has become Inoperative Account as per the provisions of the Scheme [Sub-paragraph (6) of paragraph 72] 

A member can read the provisions of the paragraph in the Scheme, but to understand this in easy terms it is requested to see the following:

If a member has retired on completion of 55 years of age
Has migrated abroad permanently
Member has died
No claim has been received for settlement for 36 months from the date when the amount became payable, 

The account becomes inoperative from that date. Once an account becomes inoperative, no interest is credited further from that date.

So members who are leaving service before 55 years of age should file claims maximum by the age of 58 years to not lose any interest.

Members who have retired after 55 years age should file claim maximum within next three years. In case of death of a member, the beneficiary should file claim maximum within 3 years of the date of death.

Illustration of Calculation of Interest

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