Home / Money / Personal Finance /  What a higher EPF interest rate means for you

New Delhi: The Employees’ Provident Fund Organisation (EPFO) has approved an increase in interest rate on employees' provident fund (EPF) from 8.55% in 2017-18 to 8.65% for 2018-19.

Accordingly, an EPF balance of 10 lakh, which would have earned 85,500 in the previous fiscal, will earn 86,500 in the current fiscal. A higher rate not only puts more money in your account in the short term, over a long period it can also compound to make a significant difference. Besides, the EPF interest is tax-free.

The employer and employee contribute 12% each of the basic salary and dearness allowance to the pension fund every month. Out of the employer’s contribution, 8.33% (up to a wage ceiling of 15,000) is credited to the Employees’ Pension Scheme, which does not earn any interest.

The higher rate brings cheer on two counts. First, this means more money in your account and, second, EPFO’s decision to put 15% of the incremental corpus in equities through exchange-traded fund (ETFs) is yet to be implemented from a subscriber’s standpoint.

“Although EPFO is investing 15% of the incremental corpus in equities, methodology for this has not been implemented. This means that the hike in interest rate is applicable on the full corpus, including on the amount invested in equity," said Amit Gopal, India business leader-investments of investment advisory Mercer.

When the rules on the equity part of the fund are implemented, subscribers will have two accounts. One part of the corpus will earn the annual interest rate, while the balance ETF units will earn returns as per the performance of the ETF portfolio companies.

Exempted pension fund trusts will also have to match the EPF interest rate. But experts say that the small hike in the EPF interest rate will not impact these trusts significantly.

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