40 million subscribers will now get a 4-year low interest rate of 8.65% on PF deposits

Central Board of Trustees took this decision in light of low surplus; fulfil aim of lowering interest rates on other saving schemes

Forty million subscribers will get a four-year low interest rate of 8.65 per cent on their money in Employees Provident Fund for the current financial year, against 8.8 per cent they received in 2015-16. The highest decision-making body, Central Board of Trustees (CBT), of the Employees Provident Fund Organisation (EPFO) took the decision at a meeting in Bengaluru despite objections raised by the trade unions. 

The decision by the body to cut interest rate was taken in light of low surplus and the finance ministry’s aim of lowering interest rates on other saving schemes.

EPFO’s financial audit and investment committee (FIAC) had recommended a similar cut in interest rate as the body’s surplus was not enough to pay an interest rate of 8.8 per cent as demanded by the trade unions.

According to sources in the labour ministry, FIAC said that continuing with an 8.8 per cent rate this financial year will leave EPFO with a deficit of around Rs 394 crore, while with an interest rate of 8.65 per cent, the body will be left with a surplus of around Rs 250 crore.  

FIAC preliminary estimates show that EPFO’s total corpus will stand at around Rs 39,000 crore for 2016-17. However, trade union members argued that FIAC has not taken into consideration the interest it will earn from the investment in equities. In September, EPFO hiked its exposure to equities to 10 per cent of total corpus from the previous five per cent. 

“We tried to impress on the minister that if the income from exchange-traded fund is added, then an 8.8 per cent rate will not result in deficit,” said D L Sachdev, general secretary, AITUC.

While there was a demand by most trade unions to continue with the 8.8 per cent rate for this financial year, the government seems to have taken largest trade union Bharatiya Mazdoor Sangh (BMS) on board. Virjesh Upadhyay, secretary of BMS said that a cut in interest rate was in line with falling interest rate worldwide. “Despite a cut, EPFO is still the most attractive savings scheme with a higher interest rate than any other savings scheme in the country,” Upadhyay told Business Standard.

A senior labour ministry official said the decision was also in line with other small savings scheme — interest rates which have been cut by the finance ministry as these are now market-linked and yield of government securities with equivalent maturities depleted — and other saving instruments in the market.  “Finance ministry has cut interest rate on public provident fund (PPF). EPFO cannot have interest rate in isolation,” the official said.

Other saving schemes give quite a less interest rates. For instance, PPF yields eight per cent interest rate as of now and also has tax exemption on contribution, accretion and withdrawal like EPF. SBI fixed deposits from five years to 10 years fetch 6.5 per cent rate of interest, but do not have tax exemptions beyond Rs 10,000. 

Ashish Shanker, head investment advisory Motilal Oswal Pvt Wealth Management, raises questions about one's retirement funds keeping pace with high inflation. 

“With interest rates being where they are and inflation continuously threatening to erode the value of money, one needs to ask a broader question for a portfolio that confines itself predominantly to debt instruments. How safe is one’s retirement money?,” he said. According to the practice, the finance ministry gives concurrence to the rate of interest fixed by the CBT, considering the income projections of a year. After its ratification, the interest rate is notified and credited into the accounts of subscribers. However, CBT and the finance ministry differed over the interest rates for 2015-16 when the North Block cut interest rate to 8.7 per cent against the former’s recommendation of 8.8 per cent. Later, the ministry relented to CBT's recommendations, after protests by unions.  

Feel the pinch

• Interest rate cut to a four-year low of 8.65 per cent 
• The decision by the body to cut interest rate was taken in light of low surplus and the finance ministry’s aim of lowering interest rates on other saving schemes
• Unions cry foul, say return on equity investment not factored in   
• According to sources, the financial audit and investment committee  said continuing with an 8.8 per cent rate this financial year will leave EPFO with a deficit of around Rs 394 crore 
• FIAC preliminary estimates show that EPFO’s total corpus will stand at around Rs 39,000 crore for 2016-17