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EPF interest rate for FY22 lowered to over four-decade low of 8.1%

Decision shows prudence; rate still attractive to small savers

The interest rate was at 8.5% for 2020-21, same as in 2019-20, which, though a seven-year low, was way higher than the returns small saver could get under any other fixed-income schemes.
While interest income from investment in debt instruments account for the bulk of EPFO's earnings, capital gains from equity have in recent years been rising, as the retirement fund body has diversified its investment portfolio.

The Central Board of Trustees of the Employees’ Provident Fund Organisation (EPFO) on Saturday decided to lower the interest on provident fund deposits for 2021-22 to an over four-decade-low of 8.1% for its nearly 6.5 crore subscribers. This is the lowest EPF interest state since 1977-78, when it stood at 8%, but still higher than the returns small savers could get under any other fixed-income schemes.

For 2020-21, the interest rate for EPF was set at 8.5%, the same as in the previous fiscal year.

At 8.1%, EPFO will have to fork out around Rs 76,000 crore as interest to its subscribers for 2021-22, which will enable it to have a marginal surplus of Rs 450 crore. EPFO now receives over Rs 2.1 trilion as subscription annually and invests its accumulated corpus — around Rs 18 trillion now – in debt and equity instruments in an 85:15 ratio.

The decision taken by CBT at a meeting in Guwahati will need to be ratified by the finance ministry before it can be notified.

Labour minister Bhupendra Yadav said EPF subscribers would find 8.1% rate on tax-free EPF investments for 2021-22 attractive given that 10-year fixed deposit with the State Bank of India yields a pre-tax return of just 5.4%. He noted that even Public Provident Fund yields tax-exempt return of 7.1%.

KE Raghunathan, one of the trustees who was present in Saturday’s meeting, told FE: “This is the best possible return that EPFO could offer to its subscribers under the current volatile market situation and given the risks involved in high-gains investments.”

Former chief provident fund commissioner KK Jalan said: “The 8.1% rate of interest definitely means good returns for the subscribers under current circumstances.” Law firm Khaitan and Co, however, said in a statement, “Lower interest rate would not only impact the earnings on social security accumulations for the vast subscriber base but may also bring in the perception of further rationalisation of interest rates in the coming years on the lines of 8% that was declared back in 1977-78.”

In 2020-21, EPFO earned a total of Rs 72,812 crore on investments from both debt and equity; it liquidated Rs 6,057 crore worth of Exchange Traded Fund (ETF) units bought between January and June 2017, booking a capital gain of Rs 4,073 crore. The redemption exercise was carried out between March 12 and March 30 last year. The exercise enabled EPFO to provide a relatively higher return to its subscribers. The EPFO had redeemed part of its investment in ETFs in previous two occasions in 2018 and in 2020, booking 37.66% and 53.15% capital gains, respectively.

Ahead of market volatility due to the Ukraine crisis, EPFO redeemed ETF investments in the current quarter and fetched capital gains of Rs 5,400 crore. The low interest rate regime that has prevailed for the last couple of years reduced the returns from debt investments. The return on debt was 6.78% in 2020-21 compared with around 7.5% in 2019-20 and 8.5% in 2018-19.

While interest income from investment in debt instruments account for the bulk of EPFO’s earnings, capital gains from equity have in recent years been rising, as the retirement fund body has diversified its investment portfolio.

“For 2021-2022, EPFO decided to liquidate some of its investment in equities and the interest rate recommended is a result of combined income from interest received from debt investment as well as income realised from equity investment. This enabled EPFO to provide a higher return to its subscribers and still allowed EPFO with a surplus to act as a cushion for providing a higher return in the future also. There is no over-draw on the EPFO corpus due to this income distribution,” the labour ministry said in an official statement.

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