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Tuesday, May 26, 2020

After small savings, FinMin may seek cut in FY20 EPFO interest rate post lockdown

Coronavirus (COVID-19): The final call regarding the rate, however, would be taken after the nationwide lockdown is lifted on May 4.

Written by Aanchal Magazine | New Delhi | Published: April 15, 2020 3:05:23 am
employees’ provident fund organisation, epfo cuts interest rate, employee provident fund rate, epfo provident fund interest rate news, coronavirus, coronavirus news, covid 19 tracker, covid 19 india tracker, business news india The Ministry is learnt to have flagged concerns on the 8.5% interest rate for EPF subscribers for FY20. (File Photo/Representational)

Coronavirus (COVID-19): After a sharp cut in small savings interest rates for April-June, the Finance Ministry is learnt to have flagged concerns about the high interest rate of 8.5 per cent for subscribers of Employees’ Provident Fund (EPF) for 2019-20. The final call regarding the rate, however, would be taken after the nationwide lockdown is lifted on May 4, since any reconsideration of the rate would require a meeting of the Central Board of Trustees (CBT) of the EPFO, officials said.

Already, there have been concerns about the interest rate for FY21, which would be finalised early next year, given the volatility in stock markets. The retirement fund body might find it tough to make its interest rate payout at over 8 per cent for the next fiscal, officials said. The EPFO is closely monitoring its investments in the stock markets, they said, adding that the situation is of concern but not alarming.

“The Finance Ministry has raised some concerns (about the EPF interest rate). It has to approve it. It will be a long-drawn process, it’s expected to be finalised after the lockdown for COVID-19 pandemic,” a senior official said.

Another CBT member said, “We are continuously monitoring the investments. It’s a matter of concern but not a matter of worry.” A formal meeting of the Finance, Investment & Audit Committee (FIAC) of the EPFO is expected to take place as soon as the lockdown is lifted next month, the official said.

The government had decided to cut small savings interest rates sharply by 70-140 basis points (bps) for the April-June quarter, following the Reserve Bank of India’s cut in the repo rate by 75 bps, alongside a slew of liquidity-enhancing measures to counter the impact of the pandemic.

Small savings rates range from 4.0-7.6 per cent and against these small savings instruments, interest rate for subscribers of EPFO has been recommended to be at a much higher 8.5 per cent for FY20.

Last month, the CBT recommended the interest rate to be cut to a seven-year low of 8.5 per cent for 2019-20 for its six crore active subscribers. As per the calculations shared in the meeting, the proposed 8.5 per cent rate was expected to leave a surplus of Rs 700 crore with the retirement fund body, while retaining interest rate at last year’s 8.65 per cent would have left a deficit of around Rs 350 crore. The estimates for surplus will need to be revised taking into account the return on equity-linked investments till March-end.

EPFO invests 85 per cent of the funds in debt instruments and 15 per cent of the investments in ETFs. The interest rate recommendation of the CBT requires nod from the Finance Ministry as per convention. The Ministry has been nudging EPFO to reduce the rate to sub-8 per cent level, in line with the overall scenario.

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