After dishing out a bonanza for around 50 million employees last year, the Employees’ Provident Fund Organisation (EPFO) has now recommended a reduction in the interest rate on the provident fund by 1.25 per cent — that is, to 8.25 per cent.
The government says it has been forced to propose a slash in the the interest rate this year, considering a shortage of Rs 510.35 crore in the interest suspense account (ISA). Further, the over-estimation of the interest income by 5.68 per cent has resulted in a hole amounting to Rs 854.13 crore from interest income.
Last year, the government’s approval of 9.5 per cent as the rate of interest was borne with a rider: the accounts of the 47.2 million members’ accounts will be updated within six months. Even so, it had clarified that any shortfall in the ISA would be adjusted in 2011-12.
The government now says that it has no option but to decrease the interest rate, since it has fallen short of its estimation. “Therefore,” the government says in its recommendation, “for deciding the rate of interest for the year 2011-12, the shortfall or surplus, if any, in ISA as on March 31, 2011, has to be ascertained for declaring rate of interest for 2011-12.”
According to its calculations, an 8.50 per cent rate of interest will lead to a deficit in the closing balance amounting to Rs 526.92 crore. If, however, 8.25 per cent is accepted as the rate of interest, then the deficit will be Rs 0.24 crore. An eight per cent rate of interest will draw a surplus of Rs 526 crore.
| Return on Instruments | New Rate (%) |
| Savings Deposit | 4 |
| 1-year time deposit | 7.7 |
| 2-year time deposit | 7.8 |
| 3-year time deposit | 8 |
| 5-year time deposit | 8.3 |
| 5-year recurring deposit | 8 |
| 5-year SCSS | 9 |
| 5-year MIS | 8.2 |
| 5-year NSC | 8.4 |
| 10-year NSC | 8.7 |
| PPF | 8.6 |
| Source: Ministry of Finance | |
Trade unions are not amused. Their leaders, who form part of the EPF’s Central Board of Trustees’ finance sub-committee that will take the issue up on December 22, says they will oppose any government move to reduce the interest rate rates.
Bharatiya Mazdoor Sangh notes the government claims that the number of EPFO members have increased. “Then how is the income of the government falling? They must first explain this before taking any decision,” says Baijnath Rai, general-secretary of the pro-BJP central trade union.
EPFO competes with other government schemes such PPF and NSC for tax-free investments. The government had, on December 1, linked the rate on small saving schemes such as PPF and NSC with the market rate on government securities. These could effectively get investors a rate of 8.6 per cent on PPF this year.