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The Employees’ Provident Fund Organisation at its meeting on Saturday proposed a cut in interest rate on employees’ provident fund deposits to a four-decade low of 8.1% for the current 2021-22 fiscal from 8.5% in the previous year.
This is the lowest interest rate since 1977-78 on deposits that employees make towards their retirement fund. Interest rate on employees provident fund that year stood at 8%.
The interest rate for the current fiscal year ending March 31 was set by the retirement fund body EPFO for its about 5 crore subscribers.
The EPFO paid 8.5% interest rate to its subscribers in 2020-21, the same as in the previous year. The EPF rate was 8.65% in 2018-19 and 8.55% in 2017-18.
Mandatory savings
Provident fund savings are mandatory under the Employees Provident Funds and Miscellaneous Provisions Act, 1952. At least 12% of an employee’s basic salary is compulsorily deducted to be saved in provident fund, while an employer co-contributes an equal amount.
Sources added that interest rates are fixed based on the earnings of the retirement fund body on the deposits it has. While the corpus has gone up by 13 per cent, interest income is up only 8 per cent.
The COVID-19 pandemic has strained EPFO’s earnings. EPFO delayed payments for 2019-20 and paid the interest in two installments, deriving from two sources of its investments — 8.15 per cent from debt investments and 0.35 per cent from the equity portfolio.
Earnings pressure
Pressured earnings forced the retirement fund manager to revise down the interest rates payable to depositors in some preceding years.
For instance, during 2017-18, the organisation paid 8.55 per cent interest rate. In 2016-17, the interest rate was higher at 8.65 per cent.
EPFO has a surplus of around Rs 450 crore after paying at a rate of 8.1 per cent. Employee representatives sought higher interest rates but the Central Board of Trustees (CBT) settled for 8.1 per cent.
A member of the CBT said the interest rate setting reflects the state of the Indian economy and the difficulty the EPFO faces in generating returns from a sizeable corpus.
The EPFO invests 85 per cent of its annual accruals in debt instruments, including government securities and bonds, and 15 per cent in equity through ETFs. The earnings from both debt and equity are used to calculate the interest payment.
The EPFO has liquidated Rs 12,785 crore worth equity investments in exchange-traded funds (ETFs) and will use capital gains of around Rs 5,529 crore from it for the FY22 EPF interest payout.
The 8.5 per cent interest rate on EPF deposits for 2020-21 was decided by the CBT in March 2021.
Final call with finmin
After the CBT decision on Saturday, the interest rate on EPF deposits for 2021-22 will be sent to the Ministry of Finance for concurrence. EPFO provides the rate of interest only after it is ratified by the government through the finance ministry.
In March 2020, EPFO had lowered the interest rate on provident fund deposits to a seven-year low of 8.5 per cent for 2019-20, from 8.65 per cent provided for 2018-19.
The EPF interest rate provided for 2019-20 was the lowest since 2012-13, when it was brought down to 8.5 per cent.
EPFO had provided 8.65 per cent interest rate to its subscribers in 2016-17 and 8.55 per cent in 2017-18.
The rate of interest was slightly higher at 8.8 per cent in 2015-16. It had given 8.75 per cent rate of interest in 2013-14 as well as 2014-15, higher than the 8.5 per cent for 2012-13.
The rate of interest was 8.25 per cent in 2011-12.