Ahead of Union Budget, Provident Fund rate slashed to 8.25%

 In one of the sharpest-ever interest rate reduction, the Employees Provident Fund Organization (EPFO) has slashed the return on statutory savings to 8.25% for the current fiscal from 9.5% last year, on cues from finance minister Pranab Mukherjee.

A notification for the reduction in rates for 4.72 crore EPFO subscribers was issued earlier this week, and comes days before the general Budget. In the present structure, the returns will be lower than the 8.6% paid under for public provident fund (PPF) deposits, a popular voluntary savings scheme.

Banks too are offering 9%-9.5% deposits of much shorter duration. But compared to banks, returns on EPF are better since the annual contribution and the interest on the balance are tax free.

At a meeting of the Central Board of Trustees last December, employee unions had demanded that the EPFO maintain the interest rate at 9.5% during the current fiscal, although based on funds available the government entity had proposed 8.25% payout.

EPFO's investment committee had said that even at 8.25%, there would be a deficit of Rs 24 lakh. But as has been the case in the past, EPFO is learnt to have spotted an unaccounted Rs 400 crore that it believes will help it push for higher interest rate.

Given the protests, representatives of employers who are on the board had suggested that 8.5% could be paid this year. The labour ministry had suggested payment of 8.6%, in line with the PPF returns, while asking the finance ministry to take the final call.

It was for the first time that North Block was asked to decide instead of the usual practice of finance ministry notifying the rate suggested by EPFO. The ministry, however, went with EPFO's calculations in notifying the 8.25% return.

Following the finance ministry order, EPFO has asked its field offices to make the payments for the year. While employee unions are expected to protest the move, union representatives on the EPFO board acknowledge that a higher payment may be difficult since the law restricts the government or any outside agency from chipping in with resources for a bailout.

EPFO recommended a lower rate of interest of PF deposit

The advisory panel of retirement fund body EPFO has recommended a lower rate of interest of 8.25 percent for the current fiscal compared to 9.5 percent last year, a move that will affect over 4.7 crore subscribers.
    
The unions' representative on EPFO's advisory body, Finance and Investment Committee (FIC), has demanded maintaining the rate of interest at 9.5 percent for 2011-12.
    
"FIC opined that payment of 8.25 percent rate of return to its 4.7 crore subscribers during this fiscal is feasible," a source privy to the development said after a meeting today.
    
"The unionists present in the meeting demanded maintaining 9.5 percent rate of return as given in 2010-11 and pointed out inaccuracies in income projection for this fiscal by EPFO officials," the source added.
    
Now FIC's recommendations would be tabled before the Employees' Provident Fund Organisation's (EPFO) apex decision making body, the Central Board of Trustees' (CBT), headed by labour minister for taking a final call on the issue in its meeting scheduled tomorrow.
    
The source said  the employees' representatives in the FIC meeting sought clarification about the income estimation error which was Rs 458.73 crore.
    
They pointed out that when rate of return on over 85 percent of the investment made by the EPFO is fixed, how could they calculate this amount on entire possible income of the body.
    
EPFO has reduced 2.5 percent (Rs 458.73) crore as estimation error from estimated income of Rs 18,349.20 crore and projected an income of Rs 17,890.47 crore.