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Business News/ Politics / Policy/  EPFO to pay 8.75% interest on PF deposits for 2014-15

New Delhi: Salaried employees will get an interest rate of 8.75% on their provident fund savings in 2014-15, the same as their retirement corpus earned in the previous fiscal year, the Employees Provident Fund Organisation (EPFO) announced on Tuesday.

Though the retirement fund manager had proposed to cut the interest rate to 8.7%, employees representatives in the Central Board of Trustees (CBT) declined to accept anything less than 8.8%, or five basis points more than last year. A basis point is one-hundredth of a percentage point.

Following a middle path, CBT headed by labour minister Narendra Singh Tomar decided to pay an interest of 8.75%. CBT is the apex decision-making body of EPFO comprising representatives of employees, employers and the government.

“We decided to give 8.75% interest to EPF subscribers and this is five basis points more than the GPF (government provident fund)," Tomar said after the meeting.

EPFO, in its agenda note to CBT members, had said that because of an improvement in the economic situation, debt market investments may not earn as much as they did the previous year. “Due to global uncertainty and downturn in domestic economy, the rate of interest" in the previous year “has been on higher side... particularly for more than nine months period in 2013-14, the rate of interest on government securities (G-Sec), state development loans (SDLs) and government guaranteed securities" was above 9%, the labour ministry-controlled EPFO said.

However, with the election of a stable government and expectations of the economy doing much better than in previous years, interest rates have moderated considerably.

EPFO argued in the meeting that though its estimate suggests it can give 8.8% interest rate to its around 50 million subscribers, it would be better if they settle for an 8.7% payout. The organization said that as the government has decided to raise the wage ceiling from 6,500 to 15,000 for mandatory provident fund compliance, it may not be possible for it to raise the interest rate.

A higher wage ceiling means all workers earning up to 15,000 per month come under the compliance bracket. The government is yet to notify this, leading to lower accumulation of funds and interest income.

“Depending on our income in hand, CBT has taken a decision today and that’s final. What we suggested earlier was keeping in mind some government decisions," said central provident fund commissioner K.K. Jalan.

EPFO has estimated that it will have a total income of 29,136.42 crore in 2014-15.

An 8.75% payout will lead to a surplus of 242 crore, but authorities said it is better to have some cash to guard against any shortfall once the wage ceiling hike is notified, which will bring more subscribers under its purview.

“Though we wanted a better interest rate than last year, we put our foot down when they talked about 8.7%. Finally, they kept it at 8.75%. When inflation is so high, government should give more interest to PF (provident fund) subscribers than reducing their payout," said A.K. Padmanabhan, president of the Centre of Indian Trade Unions and politburo member of the Communist Party of India (Marxist).

Padmanabhan, who is also a CBT member, said the board did not approve of investing in stock exchanges or exchange-traded funds. The finance ministry had suggested that the labour ministry consider investing up to 15% of EPFO’s corpus in equities.

CBT has recommended making the debt market investments flexible so that EPFO fund managers can invest up to 100% in government securities rather than the current maximum of 55%. “If we get a better interest rate on some point of time in a year, we can do so," Jalan said.

It was also decided to go in for short-term (not exceeding 15 days) borrowing of funds for participation in primary auction of securities.

“This move is expected to result in EPFO getting to invest in securities at more profitable rates. The funds would be borrowed by means of CBLO (collateralized borrowing and lending obligations), corporate term repo and other such instruments for participation in primary auction of government securities and corporate bonds," EPFO said.

“Tinkering around with investment may not solve the fundamental problem. They need to invest a portion in equities to maximize return," said Gautam Bhardwaj, director of the Invest India Economic Foundation, a private think tank that works in the field of retirement solutions.

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Updated: 26 Aug 2014, 10:56 PM IST
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