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For the first time since the 2008-09 global financial crisis, the Employees’ Provident Fund Organisation (EPFO’s) returns have beaten inflation for 2014-15, providing better safety net to over 50 million subscribers than other instruments.
In fact, other comparable instruments such as term deposits in commercial banks and the Public Provident Fund (PPF) offered less rate of return even in nominal terms for the current financial year. Recently, the Union finance ministry approved 8.75 per cent interest rate that the EPFO decided to offer its subscribers for 2014-15.
The central trade unions have been demanding a higher rate of interest. Employers and employees contribute 12 per cent each of the latter’s income to the EPFO every month.
In 2014-15, Consumer Price Index-based inflation for industrial workers (CPI-IW) till October stood at 6.5 per cent, substantially lower than its average of 10 per cent in the past five years. During 2008-09 and 2013-14, CPI-IW inflation was higher than the rate of interest offered by the EPFO.
In 2010-11 when the EPFO’s rate of interest was 9.5 per cent, subscribers’ wealth was eroded by higher CPI-IW inflation at 10.43 per cent. In that year, Rs 100 invested in the EPFO would have fetched Rs 109.5 but due to inflation the real return would have been reduced to Rs 99.5.
In fact, other comparable instruments such as term deposits in commercial banks and the Public Provident Fund (PPF) offered less rate of return even in nominal terms for the current financial year. Recently, the Union finance ministry approved 8.75 per cent interest rate that the EPFO decided to offer its subscribers for 2014-15.
The central trade unions have been demanding a higher rate of interest. Employers and employees contribute 12 per cent each of the latter’s income to the EPFO every month.
In 2014-15, Consumer Price Index-based inflation for industrial workers (CPI-IW) till October stood at 6.5 per cent, substantially lower than its average of 10 per cent in the past five years. During 2008-09 and 2013-14, CPI-IW inflation was higher than the rate of interest offered by the EPFO.
In 2010-11 when the EPFO’s rate of interest was 9.5 per cent, subscribers’ wealth was eroded by higher CPI-IW inflation at 10.43 per cent. In that year, Rs 100 invested in the EPFO would have fetched Rs 109.5 but due to inflation the real return would have been reduced to Rs 99.5.
The benefits of investing in the Employees Provident Fund is that the deposits are exempt from tax under Section 80C of the Income Tax Act.
These come under what is technically called exempt exempt exempt (EEE) scheme, meaning subscriber get tax benefit at the time of deposit, at the time of accretion and at the time of withdrawal. For term deposits in commercial banks, although the amount invested is exempt from tax, the interest earned is taxable above Rs 10,000 a year.
In the last three financial years, the term interest rates offered by banks were more than the EPFO’s.
A five-year term deposit in State Bank of India provided 9.11 per cent interest in 2011-12 when the EPFO offered 8.25 per cent. In subsequent years, the SBI rate was 8.65 per cent and 8.83 per cent against the EPFO’s 8.50 per cent and 8.75 per cent, respectively.
However, even in these years, the rate of return after adjusting for inflation and taxes, offered by the EPFO was ahead of the SBI term deposit returns.
In 2011-12, the SBI term deposit return of 9.11 per cent would decline to 6.38 per cent with a 30 per cent tax deduction. If one takes inflation into account in that financial year (8.33 per cent), Rs 100 would have fetched Rs 98.05.
On the other hand, the EPFO return would have been Rs 99.92 at 8.25 per cent interest rate. SBI is offering 8.49 per cent interest rate on five-year term deposits in the current financial year, a quarter of a percentage point less than the EPFO, even in nominal terms.
Usually the EPFO offers a better rate of return than that by PPF, which also comes under EEE. Till 2010-11, the PPF interest rate was set at eight per cent. In 2011-12 and 2012-13, the PPF offered 8.60 per cent and 8.80 per cent, more than what the EPFO provided its subscribers (8.25 per cent and 8.50 per cent, respectively). Unlike EPFO, PPF rates are now linked to government bonds of equivalent maturities.
Estimates by the financial wing of the EPFO, the finance, investment and audit committee, have shown that returns offered by the organisation are better than “four out of five funds of the National Pension Scheme.” However, this gain was subdued due to high inflation in these years.
The FIAO recommended the body to look beyond investing its corpus in bonds to the equity markets and the housing schemes.
“The rate of return should be more than inflation for creation of wealth. We are unable to respond to periodic advantages because the time we may take to decide, the advantage is lost. When inflation comes down, the rate of interest also comes down, therefore (we) can never beat inflation,” the committee said in its recommendations to the Employees’ Provident Fund Organisation this year.
