The past few years have seen the interest rate on Employees' Provident Fund (EPF) headed downwards - from 8.8 per cent in 2015-16 to 8.65 per cent in the following fiscal, a four-year low. And now the nest egg for over 6 crore people has shrunk further with the retirement fund body lowering rates by 0.1 per cent. The Employees' Provident Fund Organisation's (EPFO) apex decision making body Central Board of Trustees (CBT) recommended an interest rate of 8.55 per cent for 2017-18.
It could have been worse. Last year, speculation was rife that the rate cut would be of around 25 basis points due to lower income on bonds, where the body invests bulk of its funds, and its plan to credit exchange traded fund (ETF) units directly into the accounts of subscribers. Thankfully, the proposed cut is a smaller 10 basis points, and pretty unavoidable at that. There is a still a gap of nearly 90 basis points between the latest interest rate proposed by CBT and the 10-year G-Sec yield at 7.66 per cent. So there is a fair bit of pressure on the overall portfolio returns.
"It is difficult to evaluate about future in view of present economic scenario. We paid 8.65 per cent last fiscal, which left a surplus of Rs 695 crore. This year, we have decided to recommend 8.55 per cent for 2017-18, which will leave a surplus of Rs 586 crore," Labour Minister Santosh Gangwar, who also heads CBT, told reporters after the trustees meet, adding that he expects the finance ministry to give concurrence to this proposed rate.
As per the practice, the board's decision will now be vetted by the ministry after evaluating whether the EPFO would be able to provide the rate approved by trustees through its own income or not. Once ratified, the interest income will get credited into the account of EPFO members.
The latest rate cut, incidentally, comes amid media reports that the EPFO liquidated a portion of ETFs earlier this month in order to buck the recent trend and hold the interest rate steady. According to Gangwar, the retirement fund body has indeed sold ETFs worth Rs 3,700 crore in January and February this year, earning a return of Rs 1,011 crore. This amount helped it to bridge the income gap and offer a still-attractive rate, especially when you compare it to other small savings schemes like the ever-popular Public Provident Fund (PPF) earning 7.6 per cent, a multi-decade low. The finance ministry, in any case, has long been nudging the labour ministry to align the EPF rate with the other schemes.
But the CBT's recommendation has not gone down well with employee representatives. "When government does not contribute to the PF of subscribers, then why are they reducing the interest rate despite money in their corpus?" asked A.K. Padmanabhan, president of the Centre of Indian Trade Unions, a central trade union affiliated to the CPI(M), and a member of the CBT, posed to Mint. With this being the current government's last year in office - general elections are coming up next year - it's hardly a good time to anger the middle class.
The CBT has also decided to reduce the employee count threshold for coverage under the EPFO schemes. At present, all those units employing 20 or more employees are mandatorily covered under the social security schemes run by the EPFO and the threshold has now been reduced to 10 workers. This is not the first time that the CBT had taken this decision but implementation remained a pipedream because the required amendment in the Employees Provident Fund & Miscellaneous Provisions Act did not come through. Gangwar is more optimistic this time round, and said that the move will help increase the EPFO subscribers base, perhaps to a whopping 9 crore.
The other good news is that the labour minister launched the UAN-AADHAAR linking facility for the convenience of members using the EPFO link in UMANG mobile application. This is in addition to existing facility on the website of the EPFO. The CBT further decided to reduce the administrative charges from 0.65 per cent to 0.5 per cent of total wages, which are paid by employers.
With PTI inputs