A DISAPPOINTMENT MOVE

EPF Rate Slashed To 8.1%, Lowest In Over 4 Decades

    The Central Board of Trustees (CBT) of the Employees’ Provident Fund Organisation (EPFO), the country’s largest retirement fund, has recommended a return of 8.10 % for 2021-22 from 8.5% credited in 2020-21 and 2019-20. This was the lowest rate in 43 years, and would disappoint over 60 million of its salaried-class subscribers.

    The decision was taken at the EPFO’s board meeting in Guwahati. The CBT is a tripartite body involving government, workers and employers’ representatives and the decision of CBT is binding on EPFO. It is headed by the labour minister.The CBT, headed by the Union Labour Minister and having representatives from employers and employees, recommends the interest rate which is then ratified by the Finance Ministry. Subsequently, it gets notified by the Labour Ministry and credited into accounts of the subscribers by the EPFO. The Ministry is looking at allowing voluntary pension contributions from workers under the Employees’ Pension Scheme 1995 (EPS-95), even if they have exited the organised sector, marking the first step towards ensuring portability of social security and convergence of schemes to ensure universalisation of social security for workers of both organised and unorganised sectors.

       The last time EPFO paid lower than this rate was in 1977-78 when the interest rate was 8%. The government said that interest payments have been higher due to the buoyant stock markets, which have taken a beating in recent weeks in the wake of the Ukraine war and an expectation of monetary policy tightening in the US and other developed countries. EPFO had provided an 8.65 per cent interest rate to its subscribers in 2016-17 and 8.55 per cent in 2017-18. The rate of interest was slightly higher at 8.8 per cent in 2015-16. It had given an 8.75 per cent rate of interest in 2013-14 as well as 2014-15, higher than 8.5 per cent for 2012-13. The rate of interest was 8.25 per cent in 2011-12.                                      

         The payout, which will have to be confirmed by the finance ministry, is in line with the agency’s earnings and will leave it with a surplus of Rs.450 crore during the financial year. Under the rules, EPFO has to decide on the interest payment based on its earnings and cannot seek external support. Based on the prevailing international situation and conditions in the equity market, investment has to be balanced with social security. 

            The EPFO’s corpus for FY22 stood at Rs 9.4 lakh crore, up from Rs 8.29 lakh crore last fiscal. Its income from investments in 2021-22 stood at Rs 76,768 crore from about Rs 70,457 crore in 2020-21. Redemption of equity investment was carried out during February which resulted in the realisation of capital gains of Rs 5529.7 crore, which will be included in the income for FY 2021-22. The EPFO has also redeemed Non-Convertible Debentures (NCDs) of Air India in EPFO’s portfolio raising Rs 8944.32 crore against the face value of Rs 7772.50 crore. Financial year 2021-22 will also be the first year when the government’s proposal to tax interest on higher contributions to the EPF will come into place. The Budget for 2021-22 had proposed interest on provident fund contributions exceeding Rs 2.5 lakh per year effective April 1, 2021.

            Over the years, the finance ministry has questioned the high rate retained by EPFO and has been nudging it to reduce it to a sub-8 per cent level in line with the overall interest rate scenario. EPFO rate continues to be the highest among other savings instruments. Small savings rates range from 4.0 per cent to 7.6 per cent, and have been kept unchanged in recent quarters, despite a fall in overall market rates. The Finance Ministry had questioned the 2019-20 interest rate and the 2018-19 interest rate of 8.65 per cent as well, besides the EPFO’s exposure to IL&FS and similar entities where the exposure was deemed as “risky”. The interest rate would be officially notified in the government gazette after it gets a go ahead of the finance ministry, following which the pension fund would credit the rate of interest into its subscribers’ accounts