The Retirement fund body Employees’ Provident Fund Organisation has proposed to split previously recommended payment of 8.5% interest rate for the financial year 2019-20 into two parts, reason being, “exceptional circumstances arising out of Covid-19”. The EPFO recommends to credit 8.15%immediately to its over six crore subscribers for the year and gives the remaining 0.35%, which is linked to its equity investments, “before December 31”. It is subjected to the redemption of its units invested in exchange-traded funds or ETFs. The EPF interest rate at 8.5% is a seven-year low. There are high chances of ETF Redemptions falling below the anticipated value, in this case, the 8.15% interest rate would be the lowest since 1977-78 when the EPFO paid out an interest rate of 8%.
The announcement made in 9th September is a clear indication 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. Because of liquidity issues, the 0.35% component, or approximately Rs 2,700 crore, will be held over.
Why the EPFO board had to take this decision?
The interest rate was declared based on the earnings of FY20. 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, investment and audit committee (FIAC) of EPFO will soon meet to assess its ability to pay the declared interest.
The Finance Ministry has been putting pressure on 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 8.5% interest rate declared in the first week of March has not been approved by the finance ministry yet. The labour ministry can notify the rate only after the finance ministry approves it.
“EPFO currently, is not in the condition to disburse the money based on the interest rate it declared dor the last year as the cash flow has significantly reduced and liquidation of its funds will not be easy at the time of disbursal.
Trade Unions not happy with the decision
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 maybe 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.
The Finance Ministry had also questioned the last year’s interest rate of 8.65%
The Finance ministry questioned EPFO on the 2018-19 interest rate of 8 65%, as they had huge exposure to IL&FS, Reliance capital and DHFL. Finance Ministry was curious whether or not the EPFO had enough funds left for honouring the 8.65 per cent interest rate recommended for 2018-19.
The EPFO board in February last year recommended a hike in the interest rate — the first increase in last three years — to 8.65 per cent for 2018-19 from a five-year low of 8.55 per cent in 2017-18.
The interest rate was 8.8 per cent in 2015-16which was cut down to8.65 percent in 2016-17.
the questions of Finance ministry also included how much exposure EPFO had to IL&FS and other such risky companies, and more importantly, if any of these investments defaulted.
In the case of default, the Government will have to suffer the consequences,and pay the promised interest rate to over six crore active subscribers of EPFO. The reason why the Finance Ministry was asking for due diligence done on EPFO’s books
In May 2020, Finance Minister announced a reduction in EPF contribution by 2% to increase cash in hand
On May 18, 2020 the government announced the cut in EPF contribution by employees and employers from 12 percent to 10 percent. The slash in EPF contribution was only applicable for the months of May, June and July 2020.
NirmalaSitharaman announced a reduction in statutory EPF contribution of private-sector employers and employees from the earlier mandated 12% to 10% for 3 months, in an attempt to provide relief against coronavirus. For the government PSUs, however, the employers’ contribution will remain unchanged at 12% but PSU employees can pay 10%.
The total contribution to an employee’s EPF corpus came down with the move. Regardless, the plus point is that this deduction in the employee’s contribution from 12% to 10% will help increase the take-home pay or the cash-in-hand of the employee.