The Central Board of Trustees of the Employees’ Provident Fund Organisation (EPFO) Thursday recommended hiking the interest rate for its 6-crore active subscribers to 8.65 per cent for the current financial year of 2018-19 from a five-year low of 8.55 per cent in the previous financial year.
At 8.65 per cent, the interest rate is now at the same level as in 2016-17 and the EPFO will have a surplus of Rs 151.67 crore.
Comes when rates are falling
The rate hike is good news for employees ahead of polls but it comes when the economy is moving towards a lower interest rate regime. At 8.65%, EPFO rate will be much higher than that of most small savings instruments which offer a rate below 8% and the key policy rate set out by RBI.
The recommendation to hike EPFO’s interest comes when most other small savings instruments offer an interest rate below 8 per cent and amid downward direction in interest rates set out by the Reserve Bank of India (RBI).
Labour and Employment Minister Santosh Gangwar said the interest rate was decided as per consensus and now the ministry will send the recommendation for approval of this rate.
After the EPFO decides the interest rate, it has to be ratified by the Finance Ministry and then it gets credited into the accounts of the EPFO’s subscribers.
As per the EPFO estimates shared at the meeting, retaining the previous year’s interest rate of 8.55 per cent would have resulted in a surplus of Rs 771.37 crore. An interest rate higher than 8.65 per cent would have resulted in a deficit.
At 8.70 per cent, interest on principal amount of Rs 6.19 lakh crore, the EPFO would have faced a deficit of around Rs 158 crore, while at 8.60 per cent interest rate, EPFO would have earned a surplus of Rs 461 crore, as per the calculations.
For the first time, however, the hard copy of the income and surplus projections was not circulated to the members of the EPFO’s Finance, Investment and Audit Committee (FIAC), who met just before the CBT meeting Thursday, a member of the committee said.
The increase in interest rate will yield an interest rate higher than most small savings instruments, which are linked to yield on government securities. Among the small savings schemes, barring the Sukanya Samriddhi accounts for the girl child and 5-year savings scheme for senior citizens, most small savings rates are below 8 per cent.
Small savings rates are reset on a quarterly basis. For the January-March 2019 quarter, the government had kept rates for most schemes unchanged compared to the previous quarter. The rate on Public Provident Fund (PPF) scheme was also kept unchanged at 8 per cent in the January-March quarter.
The returns for EPFO on investment in ETFs, totalling to Rs 63,224.62 crore, have been subdued at 11.04 per cent as on December 31, 2018.
Its investment of Rs 3,232.81 crore in CPSE ETF has yielded a return of 1.89 per cent as on December 31 and investment of Rs 2,274.75 crore in Bharat 22 ETF has yielded 0.48 per cent return. The SBI Mutual Fund ETF has given return of 12.02 per cent and the ETF run by UTI has yielded 10.31 return as on December 31.
The EPFO has also invested Rs 1,500 crore in the latest tranche of Bharat 22 ETF, Central Provident Fund Commissioner Sunil Barthwal said.
The CBT also ratified the amendment in EPF Scheme 1952, as approved in the meeting of FIAC held on February 12, to enable accounting of equity and related investments in Exchange Traded Funds (ETFs), a labour ministry release said.