Provident Fund Interest Rate Cut To Four-Decade Low Of 8.1%

New Delhi- Interest rate on employees' provident fund deposits on Saturday was cut to a four-decade low of 8.1 per cent for the current 2021-22 fiscal from 8.5 per cent in the previous year.

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 per cent.

The 8.1 per cent interest rate was recommended by the Central Board of Trustees after its meeting in Guwahati under the chairmanship of Union Labour and Employment Minister Bhupendra Yadav, a labour ministry press statement said.

"The Central Board recommended 8.10 per cent annual rate of interest to be credited on EPF accumulations in members' accounts for the financial year 2021-22 (ending on March 31, 2022)," it said.

The recommendation will now go to the Union Finance Ministry and will be notified once it is approved by it.

"The interest rate would be officially notified in the government gazette following which EPFO would credit the rate of interest into its subscribers' accounts," the statement said.

The EPFO paid 8.5 per cent interest rate to its subscribers in 2020-21, the same as in the previous year. The EPF rate was 8.65 per cent in 2018-19 and 8.55 per cent in 2017-18.

Provident fund savings are mandatory under the Employees Provident Funds and Miscellaneous Provisions Act, 1952. At least 12 per cent of an employee's basic salary is compulsorily deducted to be saved in provident fund, while an employer co-contributes an equal amount.

Sources said that 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 per cent, interest income is up only 8 per cent.

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 per cent from debt investments and 0.35 per cent 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 per cent interest rate. In 2016-17, the interest rate was higher at 8.65 per cent.

EPFO has a surplus of around Rs 450 crore after paying at a rate of 8.1 per cent. Employee representatives sought higher interest rates but the Central Board of Trustees (CBT) settled for 8.1 per cent.

A member of the CBT said the interest rate setting reflects the state of the Indian economy and the difficulty the EPFO faces in generating returns from a sizeable corpus.

The EPFO invests 85 per cent of its annual accruals in debt instruments, including government securities and bonds, and 15 per cent in equity through ETFs. The earnings from both debt and equity are used to calculate the interest payment.

While the labour ministry statement did not give reasons for cutting interest rate, it said, "the Employees' Provident Fund Organisation (EPFO) despite following a conservative approach towards investment, has consistently generated high returns over the last many years which has enabled it to distribute higher interest to its subscribers, through various economic cycles with minimal credit risk."

EPFO, it said, 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 FY 2022, 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. There is no over-drawl on the EPFO corpus due to this income distribution," it said.

The assured fixed return approach of EPFO, announced by CBT every year along with the tax exemptions, makes an attractive savings option for the PF members, it added.

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 per cent 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 per cent 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 per cent for 2019-20, from 8.65 per cent 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 per cent.

EPFO had provided 8.65 per cent interest rate to its subscribers in 2016-17 and 8.55 per cent in 2017-18.

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