Explained: Why EPFO has retained 8.5% interest despite falling rates, looming FinMin challenge

The Finance Ministry has been nudging the EPFO to reduce the rate 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.

The Central Board of Trustees of the retirement fund body Employees’ Provident Fund Organisation (EPFO) on Thursday recommended that the interest rate for the financial year 2020-21 be retained at 8.5 per cent.

The recommendation was made keeping the returns on equity investments in view.

The next step, however, may face a hurdle as it needs to be ratified by the Finance Ministry, which has been nudging the EPFO to reduce the interest rate in line with overall interest rate scenario.

The rate

For FY2021, the EPFO has decided to liquidate investment in equity 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, the Labour Ministry said in a statement.

“This has enabled EPFO to provide higher return to its subscribers and still allowing EPFO with a healthy surplus to act as cushion for providing higher return in future also. There is no over-drawl on EPFO corpus due to this income distribution,” it said.

The interest rate is learnt to have been decided on an income of Rs 70,000 crore from debt and equity investments of the EPFO and is likely to leave a surplus of about Rs 200-300 crore.

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The concerns

The Finance Ministry has been nudging the EPFO to reduce the rate 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 for the January-March quarter.

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The Finance Ministry had questioned 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 risky entities.In March last year, the CBT had recommended an interest rate of 8.5 per cent for 2019-20. In September, the CBT recommended splitting the payment of the interest for the financial year 2019-20 into two parts, citing “exceptional circumstances arising out of Covid-19”. However, from January 2021 onward, the EPFO began to credit the interest in one go.

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. A total 197.91 lakh final settlement, death, insurance, and advance claims worth Rs 73,288 crore were settled during April-December 2020. Exempted establishments, which run their own PF trusts, had settled 4.19 lakh claims, disbursing Rs 3,983 crore.

The recommended interest rate for FY21 will now need to be ratified by the Finance Ministry, following which it will be notified by the Labour Ministry.

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