EPF interest rate to be cut to 8.5%

EPFO faces shortfall of Rs 370cr.

The Employees Provident Fund Organisation (EPFO) has decided to cut the interest rate payable to its 40 million subscribers by 1 percentage point to 8.5 per cent for the current financial year against 9.5 per cent paid during the last three years.

Trade unions, demanding a 9.5 per cent interest rate for 2005-06 as well, were unhappy with the decision. If the EPFO's Central Board of Trustees (CBT) had agreed to the demand, it would have faced a deficit of Rs 1,176.37 crore.

At 8.5 per cent, the EPFO faces a shortfall of around Rs 370 crore during the year as its income is estimated at Rs 6,523 crore, while liability is pegged at Rs 6,889.04 crore.

The EPFO's finance and investment committee had recommended an 8 per cent interest rate, which would have left a surplus of Rs 39.35 crore. The labour ministry will now recommend the interest rate to the finance ministry, which will notify the rate for this year.

The interest rate was decided after a three-hour meeting of the CBT, which authorised Labour Minister K Chandrasekhara Rao to decide the interest rate. The CBT meeting was followed by an hour-long consultation between Rao and officials in his ministry.

The reduction is aimed at bringing the EPF interest rates on a par with market rates. The yield on the 10-year government paper is estimated at 7.1 per cent. A bulk of the EPF corpus is invested in government securities.

"There will be an additional requirement of about Rs 370 crore but there will be no burden on the government exchequer. The burden will be on the labour ministry to find additional resources," Rao told reporters after the CBT meeting.

"We will manage with our resources but there will be no money left with us after this (paying a rate higher than the recommended interest rate). We will have to look at new avenues to reduce expenditure and raise income and interest accruals," the minister added.

Labour Secretary KM Sahni will hold an emergency meeting tomorrow to discuss ways to bridge the shortfall.

Rao will appraise the prime minister of the decision tomorrow.

Trade unions have reacted sharply to the EPFO decision. Intuc Vice-President Ashok Singh said trade unions would seek the prime minister's intervention in the matter.

On its part, Citu said it "will firmly oppose any reduction in the rate of EPF interest and will take the issue to workers and continue the struggle outside the forum of the CBT".