New Delhi: Signalling a softening of stance, the finance ministry on Tuesday indicated its direction to lower the interest rate on employees’ provident fund (EPF) is based purely on mathematical calculation and should be considered as an “advice”.
“It’s an advice, not a rate cut. The basis is pure arithmetic calculation,” a senior finance ministry official said speaking under condition of anonymity.
In a written reply to the Lok Sabha, labour minister Bandaru Dattatreya on Monday said while the Central Board of Trustees (CBT) of the Employees’ Provident Fund Organisation (EPFO) had proposed an interim interest rate of 8.8% for 2015-16, the finance ministry had ratified it to 8.7%, inviting the wrath of trade unions.
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.
Until now, CBT, the apex decision-making body of EPFO, has decided the EPF interest rate, with the finance ministry approving it as a matter of protocol. EPFO functions under the labour ministry.
The finance ministry’s move was considered in sync with its policy to lower interest rates of small saving schemes such as public provident fund (PPF), Kisan Vikas Patra (KVP) and national savings certificate which is meant to help reduce cost of funding for banks so that they can lower lending rates.
The 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%.
D.L. Sachdeva, general secretary, All India Trade Union Congress, said as per income estimates of CBT, the interest rate on EPF was calculated at 8.95% for 2015-16. “However, the labour minister said given the changing market conditions, we should take precaution and save something for the future. So we all agreed to provide interest rate of 8.8%. The finance ministry neither gives us a single penny, nor are they the custodians of the EPFO money. If everything is to be decided by the finance ministry, then why have they created the CBT,” he added.
Sachdeva said all central trade unions will hold a symbolic protest against the government move on 29 April after which they will decide their next course of action.
If the government rolls back its direction to lower EPF interest rate, it will be the third such instance involving EPFO.
Buckling under pressure, the government last week rolled back a diktat making it difficult to make withdrawals from the EPF before retirement. The move, following violent protests by textile industry workers, came a month after the government went back on its budget proposal to tax EPF.
On 10 February, the labour ministry revised EPF withdrawal norms, allowing employees to withdraw only their own contribution (12% of basic salary) to EPF and prescribing that the employer’s share (3.67% of basic salary after keeping 8.33% for Employees’ Pension Scheme) can only be withdrawn at the retirement age of 58 years.
Until then, employees had been allowed to withdraw the total EPF amount before retirement for medical emergencies, to fund children’s marriage or while changing jobs.
Before that, on 8 March, finance minister Arun Jaitley, facing a severe backlash from the salaried middle class, also rolled back a key budget proposal for only 40% tax exemption of the total corpus of EPF and National Pension System withdrawn at the time of retirement. This would have made the remaining 60% of the EPF’s incremental corpus from fiscal 2017 taxable unless the amount was invested in an annuity product.
Currently, withdrawal from EPF is entirely tax-free.
In addition, the government also decided to withdraw the provision which put a monetary ceiling of Rs.1.5 lakh on employers’ contributions to provident fund for claiming tax benefits.