Updated: March 8, 2021 9:57:01 am
The Employees’ Provident Fund’s (EPF) nearly 5 crore subscribers will receive 8.5 per cent annual interest on their accumulations for the current fiscal, if the recommendation of the scheme’s trustees is accepted by the Union Finance Ministry. The 8.5 per cent rate, unchanged from 2019-20, is way above that from any other comparable savings option. State Bank of India offers just 5.4 per cent on 5-10 years deposits, down from 6.85 per cent at the start of 2019-20 and taxable to boot. Even interest rates on the Public Provident Fund and Senior Citizens Savings Scheme have been slashed from 8-8.7 per cent and 7.1-7.4 per cent over the same period. The EPF subscriber will not only continue to be credited much higher interest, but also enjoy tax benefits similar to that on PPF.
On the face of it, there is no justification for the EPF rate being retained at 8.5 per cent — the effective post-tax returns would be far more — when 10-year-government bond yields have fallen roughly 140 basis points to 6.23 per cent in the last two years and the Reserve Bank of India’s overnight ‘repo’ lending rate is at an all-time-low of 4 per cent. But there are two possible counter-arguments to this narrow economic logic. For starters, the EPF is a forced saving. Being a compulsory contributory scheme, wherein 24 per cent of an employee’s basic wage plus dearness allowance goes towards his/her EPF account, there is a case to pay higher interest on such savings than on products that individuals voluntarily subscribe to. Secondly, India has very little by way of a social safety net for its vast majority. The focus on formalisation of employment, and the new Industrial Relations Code that allows companies to hire workers directly through fixed-term contracts, makes the EPF a universal unemployment insurance-cum-pension programme.
But this also calls for greater transparency from the body administering the EPF. The model here should be the CalPERS, the agency that manages $392.5 billion worth of retirement funds of some 2 million public employees in California. CalPERS issues quarterly updates of its investment allocations and performance, unlike the EPF Organisation, whose last published annual report is for 2018-19. While its claim of consistently generating returns of not less than 8.5 per cent looks good — especially given the premium placed on safety — there is definitely scope for benchmarking against other pension funds. Any government subvention or favourable tax treatment to improve returns should be equally subject to clear rules and proper disclosure of financial information.
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