In a U-turn, govt agrees to 8.8% EPF interest rate

The latest move is the third such decision related to the retirement savings fund to be rolled back by the government in two months


The labour ministry told the finance ministry that the EPFO had been earning interest on inoperative accounts, but had not paid returns to account holders. Photo: Ramesh Pathania/Mint
The labour ministry told the finance ministry that the EPFO had been earning interest on inoperative accounts, but had not paid returns to account holders. Photo: Ramesh Pathania/Mint

New Delhi: The Union government reversed a cut in the interest rate on Employees’ Provident Fund (EPF) on Friday—the third decision related to the retirement savings fund to be rolled back in two months.

The estimated 40 million organized sector employees will earn an 8.8% interest on their EPF for 2015-16, the government said, having earlier cut it by 10 basis points to 8.7%. One basis point is one-hundredth of a percentage point.

Workers and trade unions had protested the finance ministry’s decision to lower the EPF interest rate; the central board of trustees of the EPF Organisation (EPFO) and the labour ministry had recommended 8.8%.

“The finance ministry is now fully convinced that 8.8% interest can be paid to workers,” labour minister Bandaru Dattatreya said in New Delhi on Friday. The controversy started on Monday when Dattatreya informed the Lok Sabha that although the central board of trustees of the EPFO on 16 February proposed an interim interest rate of 8.8%, the ministry of finance had cut it to 8.7%.

The finance ministry had been concerned about the fact that the government would have to start paying interest on inoperative EPF accounts beginning this fiscal; it also had in mind a falling interest-rate scenario and the possibility of more moderate earnings in the future.

“Finance ministry thought that since millions of inoperative accounts will start earning interest from the 2016-17 financial year, it’s important to have a cushion of surplus money,” labour secretary Shankar Aggarwal said.

The labour ministry then explained to the finance ministry that the EPFO had been earning interest on inoperative accounts, but had not paid any returns to the account holders, he said.

EPFO manages a retirement savings corpus of over Rs.8.5 trillion.

Some Rs.43,000 crore is parked in inoperative accounts—those in which no contribution has been made by subscribers for at least 36 months.

The EPFO earns between Rs.2,700 crore and Rs.3,000 crore of interest per year on this corpus.

A finance ministry official said it had recommended an interest rate of 8.7% to maintain financial sustainability and ensure stable returns to EPF subscribers.

The ministry ratified the 8.8% return to subscribers after the labour ministry explained it had earned more on its corpus in 2014-15 than it estimated, the official said on condition of anonymity.

The finance ministry had advised its labour counterpart to create a reserve fund to help protect workers from potential interest rate shocks in a regime of falling interest rates, the official said.

On falling interest rates, Dattatreya said it’s a concern but added that even after paying 8.8% interest, the EPFO would still be left with a surplus of Rs.673 crore.

The unions, which went on a token strike across industrial belts and cities against the finance ministry’s decision, called the roll-back a victory for salaried workers. “This is the third time they have failed to impose their views on EPF subscribers. The finance ministry has taken anti-people decisions without reading rules or understanding ground situation. Now they have withdrawn all three decisions one by one under pressure from workers and political parties,” said D.L. Sachdeva, national secretary of the All India Trade Union Congress.

The government has faced protests from employees and labour unions on issues related to provident fund twice earlier.

The first related to a tax on EPF proposed in the Union budget and the second to EPF withdrawal restrictions imposed by the labour ministry. The protests forced the government to withdraw both decisions.

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