EPFO cuts interest rate by 15 bps to 8.5% for FY20, a 7-year low

By: |
March 06, 2020 6:45 AM

Lower than expected returns on its investments in government securities, where it is permitted to invest up to 65% of its incremental deposits, may have prompted the EPFO to opt for the rate cut.

EPFO, EPFO interest rate, Public Provident Fund, Kisan Vikas Patra, National Savings Certificate, Exchange Traded Funds, pensions schemes, finance ministryThe Employees’ Provident Fund & Miscellaneous Provisions Act, 1952 makes it mandatory for all establishments having 20 or more employees earning less than Rs 15,000 monthly wage to join the EPF scheme.

The Board of Trustees of Employees’ Provident Fund Organisation (EPFO) on Thursday fixed the interest rate on PF deposits for 2019-20 at 8.5%, a seven-year low. Over six crore subscribers will be impacted by the move, which would enable the retirement fund body to have a surplus of over Rs 700 crore.

Lower than expected returns on its investments in government securities, where it is permitted to invest up to 65% of its incremental deposits, may have prompted the EPFO to opt for the rate cut. At the rate of 8.5%, EPFO will still fetch better returns than many government-run small-savings schemes for savers such as Monthly Income Account (7.6%), National Savings Certificate (7.9%), Public Provident Fund (7.9%), Kisan Vikas Patra (7.6%) and Sukanya Samriddhi Account Scheme (8.4%). Only senior citizen Savings’ Scheme (8.6%) will get marginally higher returns.
The EPFO had provided 8.65% interest rate to its subscribers for 2018-19, 8.55% for 2017-18, 8.65% for 2016-17 and 8.55% for 2017-18. The rate of interest was higher at 8.8% in 2015-16.

Keeping a little surplus for future use from the assorted returns from its investments in different debt and equity instruments during the year, the EPFO distributes its income to its subscribers as interest on their accumulation towards employees’ provident fund. After paying out 8.65% interest, EPFO had generated a little over Rs 150 crore as surplus in 2018-19.

The retirement fund body is allowed to invest its incremental accretions, around Rs 1.3 lakh crore annually, in debt and equity instruments in the ratio of 85:15. In government securities, where it is permitted to invest upto 65% of the incremental deposits, it has fetched only 8.1% returns, CITU’s AK Padmanabhan, a CBT member, said. The EPFO invested Rs 86,966 crore in Exchange Traded Funds (ETFs) till September 2019.

The Employees’ Provident Fund & Miscellaneous Provisions Act, 1952 makes it mandatory for all establishments having 20 or more employees earning less than Rs 15,000 monthly wage to join the EPF scheme. Others can also join in the scheme voluntarily. An employee contributes 12% of the basic pay to EPF; her employer contributes 3.67% to the EPF and the rest 8.33% goes towards employees’ pension scheme (EPS).

Even as the finance ministry does not give any money to the EPFO for any interest payout, it has been putting pressure on the labour ministry to keep the interest rate under check, apprehending that with higher payout, the chances of EPFO committing a default would also be higher and in that case, the exchequer may have to shoulder the additional burden. With the CBT’s approval, the finance ministry would now notify the rate for 2019-20.

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