EPF rate to remain at 12% during current fiscal - Views on News from Equitymaster

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EPF rate to remain at 12% during current fiscal

Apr 26, 2000

The Central Board of Trustees of the Employee’s Provident Fund (EPF) has decided to retain the rate of 12% interest for the current financial year. The board on Tuesday meeting has also approved modifications in the pattern of investment as recommended by its finance and investment committees. The modification in pattern of investment approved by the board include:

  • Reduction of criterion of AAA for public sector undertakings (PSU) and public sector financial institutions (PSFIs) to ’AA+ if rated by one rating agency and AA if rated by two agencies.
  • For public sector banks, rating requirement has been reduced from “AA+” to AA only.

With the earlier decision by the Government to reduce interest rates on Public Provident Fund (PPF) and General Provident Fund (GPF) (brought down to 11% from 12%) it was being anticipated that there would be a reduction in returns offered by the Employee Provident Fund (EPF).

Even the recommendation by the finance and investment committees was for considering 11.5% per annum on monthly balance instead of 12% currently, keeping in view the yield and current interest rate scenario.

But the government has decided to continue with the 12% rate on EPF in the current fiscal. This means that the government will be forced to fully utilise the reserve to meet the interest liability that would be arising because of higher interest rate.

The earlier government announcement of a reduction in rates on Special Deposit Scheme (SDS) to 11% from 12% would add further problem for the EPF fund to generate 12% on the deposits in the fund. This is so because 81% of EPF holdings are deposited in the SDS, the rate of which has been reduced by 1% to 11%. The current estimated deposit in the fund is Rs 2.31 bn.

The table below shows the maturity value of an annuity investment of Rs 60,000 per annum for 15 years at 12% and 11% if the government had reduced the interest rate on EPF. The comparison clearly indicates that an investor's maturity value would have decreased by Rs 213,826 or 9%.

Investment
(Rs)
Rate
(%)
Years Maturity
value (Rs)
60,000 12.0% 15 2,506,196
60,000 11.0% 15 2,292,370
Decreased
maturity value
- - 213,826

The Government decision appears to be influenced by the pressure from labor unions that were totally against the reduction in the EPF rate. Taking into consideration the number of options available in developed countries for investing purpose, government decision seems to be justified, as there is not many options in India for such investment. Whatever it be, it’s good news for the employees as their deposits will continue to fetch a higher return as compared to the other options available in the market, that too tax free.


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