The ministry of finance (MoF), which was at loggerheads with the ministry of labour, over the Employees’ Provident Fund (EPF) rate of 9.5% for the fiscal year 2011 has finally relented. MoF has approved the rate, but has attached a set of conditions. The Employees’ Provident Fund Organization (EPFO) will have to update all the pending accounts in the next six months to arrive at the real surplus.
ORIGIN OF THE SURPLUS
EPFO had Rs 14,696 crore in its interest suspense account (ISA) as on 31 March 2010. Income on investments is temporarily parked in ISA and while updating members’ accounts, interest is debited from the account. Any balance in ISA also indicates there are some pending accounts. The surplus of Rs 14,696 was huge and EPFO’s central board of trustees (CBT) felt that this balance could not just be the interest pending for recent accounts.
The board decided to update its books right from inception and segregate the surplus into what was payable to EPF accounts and what was surplus. In order to arrive at what was payable, they shifted to the accrual system of accounting and updated any accrued payment since inception in their books. It was after updating these accrual payments that EPFO arrived at a surplus of Rs 1,731 crore. The new rate of 9.5% was declared in September last year for FY11.
Since these accrued payments were only accounted for in the books and not actually settled, MoF rejected the rate. The biggest contention it made was that a surplus could be verified only after all the pending accounts were settled. However, MoF diluted its stance and agreed on an interest rate of 9.5% on the condition that all the pending accounts will have to be settled in the next six months, failing which the CBT will have to revise the rates downwards for the next fiscal year, FY12, to meet the shortfall. However, EPFO is positive that it will be able to settle accounts in six months.
WHAT IT MEANS FOR YOU
You will get wealthier by a percentage point extra if you are an EPF member. You are already at an advantage since your employer contributes an equal amount to your EPF account. Additionally, your EPF investment enjoys EEE (exempt-exempt-exempt) status. In other words, your contributions qualify for a tax deduction of up to Rs 1 lakh and the money that you get back is tax exempt. With a rate of 8.5% in the past, EPF was the best debt instrument and the extra percentage point has just made it better. This rate holds good for this year only.
However, if you are withdrawing your EPF early in FY12, you will get 8.5% for the period before the new rate is declared for FY12.