The Central Board of Trustees of the Employees’ Provident Fund Organisation (EPFO), the country’s largest retirement fund, has recommended a return of 8.10 per cent for its over 6 crore active subscribers for financial year 2021-22. This is the lowest interest rate in at least four decades but remains higher than that of other small-savings instruments (see chart, page 2).
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The EPFO Board had in March last year finalised a recommendation of 8.5 per cent interest rate for the previous financial year 2020-21.
The EPFO, which has an active subscriber base of more than 6.7 crore and 6.9 lakh contributing establishments, will be left with an estimated surplus of Rs 450 crore after disbursing the interest rate of 8.1 per cent. Retaining the interest rate at 8.5 per cent, the same level as last year, would have resulted in a deficit of Rs 3,500 crore, a CBT member said after the Board’s 230th meeting Saturday in Guwahati.
“EPFO’s investments are not those like commercial bonds, it’s a commitment, assurance to workers. The Trust’s money should be safe, secure and offer optimum returns. This interest rate comes at a time when 10-year fixed deposit with the State Bank of India gives around 5.45% interest, while similar savings instruments like PPF offer interest rate in the range of 6.8-7.1%. Social security has to be kept in mind along with keeping the global situation and market volatility in mind. We cannot invest in instruments with high risk, so the interest rate was recommended at 8.10 per cent. And I am happy to announce that after (disbursing) this interest rate, the surplus will be Rs 450 crore,” said Union Labour and Employment Minister Bhupender Yadav.
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, Yadav said.
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, a Labour Ministry statement said. 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, it said.
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.
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 EPFO had retained the interest rate on PF deposits for 2020-21 at the same rate as in 2019-20 despite substantial withdrawals in the wake of Covid’s impact on people’s financial resources.
The retirement fund body saw high withdrawals and lower contributions in the aftermath of the Covid-19 pandemic. Until December 31, the EPFO had settled 56.79 lakh claims worth Rs 14,310.21 crore provided under the advance facility.
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”.
In other decisions, the CBT also approved recommendations of the ad-hoc committee on pension reforms to constitute a task force, which will suggest measures to widen the scope of pension benefits.
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.