Govt may keep provident fund interest rate at 8.5%

In what seems to be a populist move to allure voters, the government may not reduce interest rate for Employees Provident Fund Organisation...

In what seems to be a populist move to allure voters, the government may not reduce interest rate for Employees Provident Fund Organisation (EPFO) subscribers to 8.25 per cent in 2008-2009. Sources said that the government would retain interest rate at the current 8.5 per cent.

The Central Board of Trustees (CBT), headed by Labour Minister Oscar Farnandes, is likely to make an announcement in this regard after a meeting on June 17. A CBT member, who did not want to be named, told The Indian Express that the government had planned to use contingency reserve fund of the EPFO of around Rs 150 crore to meet the deficit that it would face for not slashing the interest rate.

“A problem would arise only if finance ministry has to make provisions for this deficit. Now EPFO can manage to make up this deficit with the money available under different heads, especially contingency reserve fund,” said the CBT member. The employees’ organisations had demanded increase in the interest rate, but EPFO could not manage that by itself, he added.

Story continues below this ad

The estimated earning of EPFO during 2008-09 would be about Rs 10,552 crore. By reducing interest rate to 8.25 per cent for 2008-09, the EPFO would have to pay Rs 10,379 crore whereas the payment of interest at 8.5 per cent for this fiscal comes to about Rs 10,692 crore, which means a deficit of about Rs 140 crore.

Sources said that the government was considering to reduce the interest rate to 8.25 per cent for this fiscal, but the idea faced a lot of opposition in the CBT meetings. The government had estimated a surplus of about Rs 175 crore if it cut the rate to 8.25 per cent.

According to a rough estimate, 70 to 75 per cent of EPFO deposits are invested in special deposit schemes (SDS) which have been earning interest rate of 8 per cent since 2002. The interest rate for SDS was reduced from 12 per cent to 8 per cent in 2002. Despite repeated demands of employees’ unions, the government neither changed the pattern of its investment nor increased interest rates for SDS. Hence, the government was exploring the idea of reducing interest rate to 8.25 per cent to maintain surplus in EPFO accounts.

Rs 10,552 crore The payment at 8.25 per cent

Rs 10,692 crore The payment at 8.5 per cent

Rs 140 crore The resultant deficit