The Central Board of Trustees of the Employees’ Provident Fund Organisation (EPFO) has recommended splitting payment of the interest rate of 8.5% recommended for financial year 2019-20 into two parts, citing “exceptional circumstances arising out of Covid-19”. The EPFO will credit 8.15% to its over six crore subscribers for the year immediately and give the remaining 0.35%, which is linked to its equity investments, “before December 31”. This, it said, is subject to redemption of its units invested in exchange-traded funds or ETFs. At 8.5%, the EPF interest rate is at a seven-year low. If the redemption of ETF units does not come through as anticipated, the 8.15% interest rate would be the lowest since 1977-78, when the EPFO paid out an interest rate of 8%.
Wednesday’s announcement effectively means that the retirement fund body is in a position to make only part payment of interest, amounting to around Rs 58,000 crore, right now, a member of the Central Board of Trustees said. The 0.35% component, or approximately Rs 2,700 crore, will be held over apparently due to liquidity issues.
The proposal will now be sent to the Finance Ministry for ratification. While it made the initial recommendation for 8.5% interest rate in March, the EPFO, which comes under the Labour Ministry, had not sought the Finance Ministry’s approval so far.
On March 5, while recommending the 8.5% rate for 2019-20, the Board had made no mention of redemption of ETF units for meeting the payout. A statement by the Ministry of Labour and Employment only talked about the Board’s recommendation “crediting an 8.5% annual rate of interest on the EPF accumulations in the EPF members’ accounts for the year 2019-20”.
In its statement on Wednesday, the Labour Ministry said, “In view of (the) exceptional circumstances arising out of Covid-19, the agenda regarding interest rate was reviewed by the Central Board and it recommended the same rate @ 8.50% to the Central Govt. It would comprise 8.15% from debt income and balance 0.35% (capital gain) from the sale of ETFs subject to their redemption by 31st December, 2020. It further recommended to account such capital gains in the income of the financial year 2019-20 as being an exceptional case.”
The All India Trade Union Congress, which is a part of the Board, said in a statement, “It was proposed that 8.15% interest on PF accumulations (be paid) for the present, but may be increased to 8.5% in December retrospectively, provided the securities to be sold do not make a loss. The trade unions were opposed to (a) reduction in interest on PF.”
In March, at the time of announcement of the 8.5% rate, Labour and Employment Minister Santosh Kumar Gangwar had said the interest rate would leave a surplus of Rs 700 crore. At Wednesday’s meeting, there was no detailing of the surplus left after payout of the 8.15% interest rate.
Returns from equity investments of the EPFO worth over Rs 1 lakh crore turned red in 2019-20, yielding negative 8.3%, official data showed.
The Finance Ministry has been nudging the EPFO to reduce the rate to sub-8% level in line with the overall interest rate scenario, which is under strain given the economic slowdown. Small savings rates range from 4.0-7.6%.
The Finance Ministry had questioned the 2018-2019 interest rate of 8.65% as well, besides the EPFO’s exposure to IL&FS and similar risky entities.
Concerns about risky investments were also raised at the EPFO meeting on Wednesday, with Board members stressing on recovery of investments made in Reliance Capital, DHFL, IL&FS and Indiabulls, a Board member said.
There have also been concerns about the EPFO interest rate for the 2020-21 financial year, which would be finalised early next year, given the volatility in stock markets. The retirement fund body might find it tough to make an interest rate payout above 8% for 2020-21, officials said.
The EPFO invests 85% of its annual accruals in the debt market and 15% in equities through ETFs. As per convention, after the Central Board of Trustees recommends the interest rate, it has to be ratified by the Finance Ministry and then it gets credited into the accounts of the fund’s subscribers.
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