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The central board of the Employees’ Provident Fund Organisation (EPFO) on Thursday decided to pay 8.5% interest to its 50 million salaried subscribers for 2020-21, as a frenzied stocks rally in the past year boosted returns.

The retirement fund manager expects to earn around 70,000 crore in the year to 31 March, including a little more than 4,000 crore from its investments in funds that track stock market indices. EPFO paid 8.5% to its members in the previous year.

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“The interest rate recommended is a result of combined income from interest received from debt investments, as well as income realized from equity investments," the retirement fund body said after its central board meeting. “This has enabled EPFO to provide higher returns to its subscribers and still allow it to keep a healthy surplus to act as a cushion for providing higher returns in the future."

Salaried class in a sweet spot
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Salaried class in a sweet spot

EPFO will retain a buffer of between 800 crore and 900 crore after this year’s payout, said K.E. Raghunathan, a member of the central board of EPFO.

That is more when compared with the 700 crore surplus that EPFO retained in the previous year, drawing criticism that the body was risking the stability of the fund by digging too deep into its reserves.

The central board of trustees, headed by the labour minister, is the apex decision-making body of EPFO and comprises representatives of employees, employers, the central government and some states.

“The employee representatives on the board were demanding at least 8.55%, but the board decided to go with 8.5%, the same as last year. It shows EPFO is a competitive organization in terms of generating returns," Michael Dias, a board member of the retirement fund organization, said after the meeting in Srinagar.

Considering the high-quality credit profile of EPFO’s investments, the interest rate payout is considerably more than comparable investment avenues available to subscribers.

The 8.5% interest rate compares favourably with other provident funds such as general provident fund (GPF) and savings schemes such as the public provident fund (7.1%) and the national savings certificate (6.8%). A government official said that while millions of people drew funds from their EPFO savings during the pandemic, the final calculation showed that the withdrawals did not hurt the earnings of the retirement fund manager.

The pension fund’s equity investment from 2015-16 through exchange-traded funds based on the NSE 50 and the BSE 30 indices is allowing EPFO to generate higher returns, although it comes with the associated risks of investing in such assets.

The fund manager generated about 3,000 crore from the sale of its exchange-traded funds (ETF) holdings in the previous fiscal year, but this year, it expects to earn more than 4,000 crore from a similar sale. EPFO allocated 5% of its incremental corpus to equity investments through ETFs in FY16. Gradually, its equity allocation was increased to 15% of its annual EPF deposits.

The EPFO central board’s decision will have to be approved by the finance ministry before the money is credited to subscribers.

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