Interest rate on PF reduced: How does it affect salaried employees?

The central board of trustees (CBT) of the Employees Provident Fund Organisation (EPFO) came to a common consensus at a recent meeting held to lower the interest rate on employee provident fund deposits from 8.65 per cent in 2018-19 to 8.50 per cent in FY20. The CBT led by the Union Labour Minister, is the apex decision-making body of EPFO.

Impact of the EPFO move

Salaried employees will get 0.15 per cent lower returns on provident fund deposits. A basis point is a hundredth of a percent, which means that employees will earn lower returns on their mandatory retirement savings investment.

This move will affect 6 crore salaried professionals in the country, considering the EPF interest rate is the lowest offered since 2012-13, when it was 8.5 per cent. Also, the interest earned on EPF enjoys EEE (exempt-exempt-exempt) status, and is tax-free at maturity or even otherwise. Hence, many salaried professionals view EPF as one of the most dependable retirement savings options.

With the Government of India being the guarantor, the labour ministry is now awaiting concurrence from the finance ministry to vet the proposal for the new EPF interest rate. An approval from the finance ministry is needed on the EPF interest rate decided for each year to avoid any liability arising on account of shortfall in the EPFO income earnings for the current fiscal.

The finance ministry has been pushing the labour ministry for quite some time to align the EPF interest rate with other small saving schemes such as the public provident fund and post office saving schemes run by the government.

Interest rate changes by EPFO since 2012-13

Through years, the provident fund interest rate was better than fixed deposits. In the past, EPFO had been providing 8.65 per cent rate of interest for its subscribers in 2016-17, 8.55 per cent in 2017-18, higher rate of interest at 8.8 per cent in 2015-16, and 8.75 per cent rate of interest in 2013-14 and 2014-15 respectively.

The economic slowdown has already made its impact felt on the EPFO earnings from debt market instruments that include fixed deposits and government securities.Since the earnings on long-term fixed deposits, government securities and bonds have fallen by 50-80 basis points during the year, it seems the EPFO is finding it difficult to offer interest rate of 8.65 per cent to its subscribers and sustain its earnings this fiscal.

EPFO invests 85 per cent of its annual accruals in the debt market and 15 per cent in equities through exchange traded funds. As on March 31, 2019, EPFO has made a cumulative investment of Rs 74,324 crore fetching a return of 14.74%, according to news reports.

Union Labour Minister, Santosh Gangwar believes providing 8.5 per cent interest rate on EPF for this fiscal will result in surplus earnings of over Rs 700 crore by EPFO.