EPF interest rate may be lowered this year
New Delhi: Provident fund savings are set to fetch subscribers lower returns this fiscal year.
The Employees’ Provident Fund Organisation (EPFO), which offered its subscribers a return of 8.65% in the year ended 31 March, will likely cut the rate by at least 25 basis points this fiscal year, two labour ministry officials said on Wednesday. A basis point is one-hundredth of a percentage point.
Falling returns on debt market instruments like bonds and fixed deposits may prompt EPFO, which functions under the labour ministry, to cut the return on provident fund savings, the officials cited above said on condition of anonymity.
“The debt market investments...are fetching between 6.5% and 7.75% now and that’s really lower than what we used to earn over the previous two years,” said one of the two officials cited above.
For example, on 1 July 2016, benchmark 10-year G-Secs, or government securities, were fetching 7.419%; on 3 July 2017, the rate had fallen to 6.564%. This year, 1 and 2 July fell on the weekend, a holiday for the debt markets.
“When the interest rate in the market goes down by let’s say 100 basis points, it has the potential to impact our payout by up to 70 basis points,” said the second government official. “So an 8.65% rate is untenable this year and you may see more than a 25 basis point cut in the rate when it is announced.”
This fiscal year, EPFO is investing 85% of its annual accruals in the debt market and 15% in equities through exchange-traded funds. Last year, its debt market exposure was 90%. Besides government debt securities, it also invests in corporate bonds and bank fixed deposits.
Axis Bank raised Rs5,000 crore through a sale of Basel-III compliant bonds to EPFO at a coupon rate of 7.66%, Mint reported on 15 June. Axis Bank then said that this is the “lowest coupon rate so far on the Tier-II bonds of any private sector bank”.
To be sure, the central board of EPFO, comprising representatives of the government, employers and employees, discuss the retirement fund manager’s earnings of the year before deciding on the provident fund interest rate. The finance ministry needs to formally approve the rate.
In the last fiscal year, EPFO earned a return of 13% on its investments in equity.
“The returns are encouraging but since equity investments are long-term, its value right now is notional,” said Prabhakar Banasure, a member of the finance advisory committee of EPFO and an employees’ representative on the central board of trustees of EPFO. Banasure also agreed that the interest payout this year will likely be lower than last year’s.
EPFO manages a corpus of more than Rs12 trillion and has an active subscriber base of over 45 million, labour minister Dattatreya said on Wednesday. Some 450,000 establishments/firms are members of EPFO.
The second government official noted that the central government had been lowering the interest rate on small savings schemes including the Public Provident Fund (PPF) and the Kisan Vikas Patra (KVP) over the last few quarters. And that message “cannot be ignored”, he said.
As per the finance ministry’s notification, PPF will fetch a rate of 7.8% in the July-September quarter, 10 basis points less than in the quarter to June.
KVP will yield 7.5%, again 10 basis point less than in the three months to June.
Ravindra N. Sonavane in Mumbai contributed to this story.