Finance ministry differs with EPFO, slashes EPF interest rate to 8.7%
Govt move could trigger protests; rate is lowest in three years and will affect interest earnings of over 40 million employees
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New Delhi: The finance ministry has set the interest rate offered to employees provident fund (EPF) subscribers at 8.7% for 2015-16, lower than the 8.8% suggested by the labour ministry and the EPF Organisation (EPFO), a move which could set it on a collision course with labour unions.
In a written reply to the Lok Sabha, labour minister Bandaru Dattatreya said the Central Board of Trustees (CBT) of EPFO at its 211th meting on 16 February proposed an interim interest rate of 8.8%.
“The ministry of finance has, however, ratified an interest rate of 8.7%,” Dattatreya told Lok Sabha.
The interest rate is the lowest in three years and will affect the interest earnings of over 40 million organized sector employees.
Labour secretary Shankar Aggarwal said his ministry has written to the EPFO for its response on the issue and will take up the matter with the finance ministry after receiving its reply.
The government has faced protests from employees and labour unions on issues related to provident fund twice in as many months—first related to a tax on EPF proposed in Union budget 2016-17 and the next related to the withdrawal restrictions imposed by the labour ministry. The protests had forced the government to withdraw both decisions.
The latest move, too, may trigger protests.
Labour unions across party lines, including the Bharatiya Mazdoor Sangh (BMS), the central union affiliated to the ruling Bharatiya Janata Party, on Monday raised its voice against the “turn of events” and “reduced interest rate despite EPFO having an income in 2015-16 to give a better interest rate”.
Other unions, too, warned of a workers’ backlash.
“This is part of an organized offensive by the finance ministry against EPF subscribers since February. The labour minister who heads the central board of trustees had told the board that he is for 8.8% interest rate and would negotiate with the finance ministry for a further hike in rate of interest for 2015-16 as the EPFO’s earning was allowing for a 8.95-9% interest rate payout,” said A.K. Padmanabhan, president of the Centre for Trade Union Congress, a central trade union.
“On one hand, government is pushing for more equity investment for improving EPF interest rate with no results so far, and on the other hand, when the earnings are high even from debt market instruments, it is slashing interest rate. This is condemnable,” said Padmanabhan, who is also CBT member of EPFO representing workers.
Both EPFO and the labour ministry had said after the February meeting that the rate of interest was categorized as interim, as labour unions were demanding 9% and there was little chance of a reduction in rate from the 8.8% announced in February.
“CBT of EPFO recommended an 8.8% rate of interest for the year 2015-16. During the month, the 211th meeting of the central board of trustees, EPF, was held at Chennai. The board deliberated on the rate of interest for the financial year 2015-16 and recommended an 8.8% interest on the PF balances in members’ accounts,” EPFO had reiterated on 11 March.
So far, CBT, the apex decision-making body of EPFO, used to decide on EPF interest rate and the finance ministry would approve it as a matter of protocol. EPFO functions under the labour ministry.
“It’s illegal on the part of the finance ministry and the government to reduce the interest rate after CBT has finalized it based on the financial position of the retirement fund body. This is almost undermining of the CBT of EPFO and we will protest in front of all EPF offices in the country against the anti-worker decision,” said Virjesh Upadhyay, general secretary, BMS.
However, a labour ministry official said that in the backdrop of reduced interest rates of small saving schemes such as public provident fund (PPF), Kisan Vikas Patra (KVP) and national savings certificate, the finance ministry ratified the rate a bit. “In the changing economic environment, the finance ministry may have thought of rationalizing the EPF interest rate,” said the official, who declined to be identified.
The revised interest rate on PPF has been cut to 8.1% starting 1 April against 8.7% last fiscal. The interest rate on one-year time deposit has been reduced to 7.1% from 8.4%. The interest rate paid on KVP, which matures in 110 months, was cut to 7.8% from 8.7%.
The revised interest rates on small savings will be applicable for the first quarter of 2016-17 whereas the EPF rate is applicable for the entire year. Banks have complained that higher interest rates on small savings have prevented them from cutting deposit and lending rates substantially, Mint reported on 19 March.