In a major hit to the earnings of over sixty million subscribers of the Employees Provident Fund Organisation (EPFO), the central board of trustees of EPFO have approved 8.10% as the rate of interest on PF deposits for 2021-22, lowest in more than four decades.
This is the lowest interest rate since 1977-78 on deposits that employees make towards their retirement fund. Interest rate on employees provident fund that year stood at 8%.Since then, it has been either 8.25% or more.
The EPFO had credited 8.5% in 2019-20 and 2020-21 while it was 8.65% in 2018-19, 8.55% in 2017-18, 8.65% in 2016-17 and 8.8% in 2015-16.
The decision was taken after much resistance from the trade unions at the EPFO’s board meeting in Guwahati on Saturday. The central board of trustees of EPFO or 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 Central Board recommended 8.10% annual rate of interest to be credited on EPF accumulations in members’ accounts for the financial year 2021-22. The interest rate would be officially notified in the government gazette following which EPFO would credit the rate of interest into its subscribers’ accounts," said Ministry of Labour & Employment in a statement.
Provident fund savings are mandatory under the Employees Provident Funds and Miscellaneous Provisions Act, 1952. At least 12% of an employee's basic salary is compulsorily deducted to be saved in provident fund, while an employer co-contributes an equal amount.
Traditionally, EPFO has been able to give a higher rate of interest on retirement savings in comparison to other available investment options because of its prudent investment policy of investing in long tenor high yielding securities for the past several decades. This has ensured that the returns on EPFO’s investments are higher even when the yields have been steadily coming down in the past decade.
"For FY22, 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 realized 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," the ministry added.
However, the finance ministry has to vet the interest rate declared by CBT before it is notified. The interest income gets credited into the subscribers’ account after being notified
Finance ministry has been nudging the labour ministry to lower the interest rate on provident deposits and to bring them at par with other small saving schemes.
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% from debt investments and 0.35% from the equity portfolio.
Pressured earnings forced the retirement fund manager to revise down the interest rates payable to depositors in some preceding years. For instance, during 2017-18, the organisation paid 8.55% interest rate. In 2016-17, the interest rate was higher at 8.65 %.
EPFO would have a surplus of around Rs 450 crore after paying at a rate of 8.1 %. Employee representatives sought higher interest rates but the Central Board of Trustees (CBT) settled for 8.1 %.
The EPFO invests 85% of its annual accruals in debt instruments, including government securities and bonds, and 15% 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 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.
The 8.5 % interest rate on EPF deposits for 2020-21 was decided by the CBT in March 2021. It was ratified by the finance ministry in October 2021 and thereafter, EPFO issued directions to field offices to credit the interest income at 8.5% for 2020-21 into the subscribers' accounts.
Now, after the CBT decision on Saturday, the interest rate on EPF deposits for 2021-22 will be sent to the Ministry of Finance for concurrence. EPFO provides the rate of interest only after it is ratified by the government through the finance ministry.
In March 2020, EPFO had lowered the interest rate on provident fund deposits to a seven-year low of 8.5 % for 2019-20, from 8.65 % 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 %.
EPFO had provided 8.65 % interest rate to its subscribers in 2016-17 and 8.55 % in 2017-18.
The rate of interest was slightly higher at 8.8 % in 2015-16. It had given 8.75 % rate of interest in 2013-14 as well as 2014-15, higher than the 8.5 % for 2012-13. The rate of interest was 8.25 % in 2011-12.