The government has approved 8.1 percent rate of interest on employees' provident fund (EPF) deposits for 2021-22 -- an over four-decade low -- for about five crore subscribers of retirement fund body EPFO.
The Narendra Modi government on Friday approved an 8.1 percent rate of interest on employees' provident fund deposits for the 2021-22 fiscal. This is the lowest since 1977-78 when the EPF interest rate stood at 8 percent.
Earlier in March this year, the Employees' Provident Fund Organisation (EPFO) had decided to lower the interest on provident fund deposits for 2021-22 to 8.1 percent from 8.5 percent provided in 2020-21.
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Now, after the ratification of the interest rate by the government, the EPFO would start crediting the fixed rate of interest for the fiscal into the EPF accounts.
The 8.5 percent interest rate on EPF deposits for 2020-21 was decided by the Central Board of Trustees (CBT) in March 2021. It was ratified by the finance ministry in October 2021. Thereafter, the EPFO issued directions to field offices to credit the interest income at 8.5 percent for 2020-21 into the subscribers' account.
The EPFO paid an 8.5 percent interest rate to its subscribers in 2020-21, the same as in the previous year. The EPF rate was 8.65 percent in 2018-19 and 8.55 percent in 2017-18.
Provident fund savings are mandatory under the Employees Provident Funds and Miscellaneous Provisions Act, 1952. At least 12 percent of an employee's basic salary is compulsorily deducted to be saved in the provident fund, while an employer co-contributes an equal amount.
Interest rates are fixed based on the earnings of the retirement fund body on the deposits it has. While the corpus has gone up by 13 percent, interest income is up only 8 percent.
The COVID-19 pandemic has strained EPFO's earnings. EPFO delayed payments for 2019-20 and paid the interest in two installments, deriving from two sources of its investments -- 8.15 percent from debt investments and 0.35 percent from the equity portfolio.
For instance, during 2017-18, the organisation paid 8.55 percent interest rate. In 2016-17, the interest rate was higher at 8.65 percent. EPFO has a surplus of around Rs 450 crore after paying at a rate of 8.1 percent. Employee representatives sought higher interest rates but the Central Board of Trustees (CBT) settled for 8.1 percent.
The EPFO invests 85 percent of its annual accruals in debt instruments, including government securities and bonds, and 15 percent in equity through ETFs. The earnings from both debt and equity are used to calculate the interest payment.
The EPFO has liquidated Rs 12,785 crore worth of equity investments in exchange-traded funds (ETFs) and will use capital gains of around Rs 5,529 crore from it for the FY22 EPF interest payout.
In March 2020, EPFO had lowered the interest rate on provident fund deposits to a seven-year low of 8.5 percent for 2019-20, from 8.65 percent provided for 2018-19. The EPF interest rate provided for 2019-20 was the lowest since 2012-13, when it was brought down to 8.5 percent.
EPFO had provided 8.65 percent interest rate to its subscribers in 2016-17 and 8.55 percent in 2017-18. The rate of interest was slightly higher at 8.8 percent in 2015-16. It had given 8.75 percent rate of interest in 2013-14 as well as 2014-15, higher than the 8.5 percent for 2012-13. The rate of interest was 8.25 percent in 2011-12.
First Published: IST