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After recommending a cut in interest rate of 8.65 per cent earlier this month for subscribers of Employees’ Provident Fund Organisation (EPFO) for 2016-17, the finance ministry has now relented and given its nod for it following a series of discussions with the labour ministry.
“Finance ministry has agreed to 8.65 per cent rate of interest. Now, the communication will come. The formal discussions are over,” labour minister Bandaru Dattatreya said.
“We will immediately issue the notification and credit the rate of interest to over four crore subscribers,” he added.
Finance ministry officials said that the agreement was reached on Thursday after labour ministry assured them of the tenability of 8.65 per cent interest rate for four crore of EPFO’s contributing subscribers. The interest rate is likely to be notified within a week, labour ministry officials said.
Earlier this month, the finance ministry had written to the labour ministry recommending a cut in the EPFO interest rate for 2016-17, asking to be absolved from any liability to pay in case the retirement fund body fails to make its payouts.
In February, the finance ministry had sought clarifications from the labour ministry, mainly pertaining to the EPFO’s ability to pay an interest rate of 8.65 per cent and the payouts to be made in case of inoperative accounts. In its reply, the labour ministry had justified the payout.
Last December, the Central Board of Trustees (CBT) of the EPFO had recommended an interest rate for 2016-17 of 8.65 per cent, the lowest in four years, for nearly 17 crore of its subscribers. As per general practice, the decision pertaining to interest rate by the CBT, the governing body that manages the fund and is chaired by the labour minister, needs an approval from the finance ministry.
According to calculations presented at CBT’s December meeting, retaining the interest rate at last year’s 8.8 per cent would have resulted in a deficit for 2016-17 at Rs 383.82 crore. At a lower interest rate of 8.7 per cent, there would have been a marginal surplus of Rs 69.34 crore. At 8.65 per cent, the rate proposed by the CBT, the projected surplus for 2016-17 was pegged at Rs 295.91 crore.
Both the ministries were embroiled in a tug of war regarding the interest rate last year as well, after the finance ministry had approved a lower EPF rate of 8.70 per cent for 2015-16 even though the Labour Ministry had announced a rate of 8.80 per cent. After several protests by trade unions, however, the finance ministry reverted to the initial announcement of 8.8 per cent rate for 2015-16.
The finance ministry has been asking the labour ministry to bring the EPF rate in alignment with other small savings schemes as it continues to be the fixed income instrument with the highest return. The finance ministry has cut interest rate for all small savings schemes by 10 basis points for April-June, except interest rate on savings deposits which has been retained at 4 per cent.