Monday, December 11, 2023

Provident fund interest rate cut to four-decade low of 8.1%

provident fund

New Delhi, March 12: Interest rate on employees’ provident fund deposits on Saturday was cut 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 8.1% interest rate was recommended by the Central Board of Trustees after its meeting in Guwahati under the chairmanship of Union Labour and Employment Minister Bhupendra Yadav, a labour ministry press statement said.
“The Central Board recommended 8.10% annual rate of interest to be credited on EPF accumulations in members’ accounts for the financial year 2021-22 (ending on March 31, 2022),” it said.
The recommendation will now go to the Union Finance Ministry and will be notified once it is approved by it.
“The interest rate would be officially notified in the government gazette following which EPFO would credit the rate of interest into its subscribers’ accounts,” the statement said.
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.
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 said 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%, interest income is up only 8%.
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% from debt investments and 0.35% from the equity portfolio.
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% interest rate. In 2016-17, the interest rate was higher at 8.65%.
EPFO has a surplus of around Rs 450 crore after paying at a rate of 8.1%. Employee representatives sought higher interest rates but the Central Board of Trustees (CBT) settled for 8.1%.
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% of its annual accruals in debt instruments, including government securities and bonds, and 15% in equity through ETFs. The earnings from both debt and equity are used to calculate the interest payment.
While the labour ministry statement did not give reasons for cutting interest rate, it said, “the Employees’ Provident Fund Organisation (EPFO) despite following a conservative approach towards investment, has consistently generated high returns over the last many years which has enabled it to distribute higher interest to its subscribers, through various economic cycles with minimal credit risk.” (PTI)