EPF Interest Rate slashed by 15bps to 8.5% – Know the full story

Deepti Shikha

12 Mar, 2020

The trustees of the Retirement fund body EPFO or Employees’ Provident Fund Organisation fixed the interest rate on Provident Fund (PF) deposits for 2019-20 to a seven-year low at 8.5%. More than six crore subscribers will be impacted by this move, which will enable the Employees Provident Fund Organisation to have a surplus of over Rs 700 crore. The EPF interest rate was provided at 8.65 percent for 2018-2019. The interest income of the Employee Provident Fund Organisation in the current year is pegged at Rs 58,500 crore in addition to the notional income of Rs 2,500 crore from investments in exchange-traded funds in 2016.

What is EPF or Employees’ Provident Fund?

The Employees’ Provident Fund or EPF is a savings scheme prescribed under the Employees’ Provident Fund and Miscellaneous Act, 1952. It is managed and regulated by the Central Board of Trustees (CBT) that consists of representatives from three parties:

• The government,
• The employers,
• The employees.

The Employees’ Provident Fund Organisation (EPFO) assists the CBT in its activities. EPFO functions under the jurisdiction of the government and is managed by the Ministry of Labour and Employment.

Employee Provident Fund or EPF Interest Rate in Different Years

Comparison of EPF Interest Rate on other Saving Schemes

•  EPFO at the rate of 8.5% will fetch better returns than many small saving schemes introduced by government.

Different saving schemes and their interest rates are mentioned below:

Only Senior Citizen Savings’ Scheme provides higher returns than the EPF Scheme.

How will the EPF interest rate cut affect salaried employees?

Salaried employees who invest in employee provident funds will receive 0.15 per cent lesser returns on the amount they deposit in this fiscal year as compared to last year. Last year’s interest rates were 8.65 per cent.

However, even at 8.5 per cent, the interest rate is higher than the interest rate for small savings. As per the experts, the subscribers may not lose too much of the returns in interest.

Approval needed for the implementation of new EPF Interest Rate from the Finance Ministry

EPFO manages a collection of over Rs.12 trillion and every year; it has a fresh corpus of around Rs.1.46 trillion. From its annual deposits, the fund manager invests approximately 15% in equity and the rest in debt instruments, including the government and corporate bonds.

Before implementing the new rate the CBT decision needs formal approval from the finance ministry. Though this approval is just a formality, the Finance Ministry has the power to question the interest rate announced by the Employee Provident Fund Organisation. The 2018-2019 EPF interest rates had faced tough questions. Still, the Finance Ministry approved the move almost after seven months of its announcement. Hence it is expected that the Finance Ministry will approve the EPF interest rate for the year 2019-2020.

Other Ratification is done by Employee Provident Fund Organisation

The Employee Provident Fund Organisation or EPFO also ratified and appreciated the restoration of normal pension after fifteen years from the date of commutation. This will benefit about 6,30,000 pensioners who in the past had opted for partial withdrawal on or before 25^th September 2009.

Statements Regarding the new EPF Interest Rates

According to Bharatiya Mazdoor Sangh which is an affiliate of the Rashtriya Swayamsevak Sangh said that they had protested against the reduction in EPF interest rate. Still, due to the non-availability of new income generation, the finance committee suggested for only 8.5%.

As per K. Padmanabhan, vice president of the Centre for Indian Trade Unions (CITU) and also a member of the CBT said that the no agenda was shared by the EPFO officials related to the  EPF interest rate. He also said the CBT officials had a pre-decided rate.

K.E. Raghunathan an another CBT member representing its employers said that 8.5% rate is far better than most other investments, and the minister decided to pay 8.5% as against 8.45% suggested by the investment committee of the fund manager.

Key Points

• The new EPF interest rate is 15 bps below the figure of the previous fiscal year, affecting the earnings of over 60 million subscribers.
• Even after paying 8.5 % interest, the Employee Provident Fund will have a surplus of Rs. 700 crore as specified by Santosh Gangwar, labour Minister.
• The EPF interest rate announced for the current fiscal year is lowest since 2012-2013 when it was around 8.5%.
• Ratification of restoration of regular pension is announced by the CBT after 15 years from the date of the commutation, benefitting 6.3 lakh pensioners, who opted for compensation on or before 25^th of September, 2008.

Takeaway

The Employee Provident Fund scheme aims at promoting savings which can be used post-retirement by various employees all over the country. The amount of interest received on the deposit along with the total accumulated amount is totally tax-free. The interest earned on the Employees’ Provident Fund account is calculated depending on the rate decided by the Central Board of Trustees along with the Finance Minister. The interest rate of 8.5% on EPF will be applicable from the Financial Year 2019-20.