Windfall gain: EPF interest rate hiked to 9.5% for '10-11

Source : TNN, Sep 16, 2010, 12.17am IST
NEW DELHI: Diwali came early for salaried employees on Wednesday as the Employees' Provident Fund Organisation (EPFO) on Wednesday raised the interest rate on retirement benefits by a full percentage point to 9.5% for 2010-11 from 8.5% for the previous year. This move will benefit 4.70 crore organised sector workers. Corporates which run their own PF trusts will also have to match the new rates.

In fact, while the official interest rate is 9.5%, the actual rate of return works out to 13.8% (assuming investment of Rs 70,000 for the year in the instrument). That's because tax is saved both on the principal invested as well as the interest, translating into a very healthy return post tax, which is almost double that provided by fixed deposits (see graphic).

Wednesday's increase took the EPF interest rate to a five-year high and was made possible due to the surprise discovery of nearly Rs 1,700 crore in the suspense account -- meant for unclaimed PF money. The windfall was discovered after the central board of trustees last year ordered a review of all EPF accounts since 1952.

The decision of the board of trustees, headed by labour minister Mallikarjun Kharge, to hike the interest rate will be forwarded to the finance ministry for its notification. The 9.5% interest rate will result in an additional outgo of Rs 1,600 crore, which will be used from the surplus of Rs 1,731 crore in the interest suspense account of EPFO.

Kharge told reporters that the EPFO trustees had decided not to invest in the stock markets and would continue to follow the existing investment pattern. "We had received a letter from the finance ministry asking for parking of a portion of EPFO funds in the stock market. We have received huge opposition from CBT members who oppose the idea of investing in stock markets," Kharge said.

The EPFO maintains a huge corpus of over Rs 300,000 crore, whereas all recognised PFs managed by it have accumulated funds to the tune of Rs 200,000 crore.

Deepankar Mukherjee, CITU national secretary who was part of the board decision, said this was a short-term measure but the government must ensure that workers get a higher interest given the fact that there is high inflation and funds are parked in government securities.

"The interest rate was as high as 12% not very long ago. It was brought down as the government felt inflation had come down substantially. Now that inflation is in double digits, it must announce an additional interest subsidy as stimulus," Mukherjee said.

Between 1989-90 and 2000, the rate of interest on PF was 12%. It was reduced to 11% in July 2000 and thereafter the slide began. The reason for fall in interest rates was overall fall in interest rates in banks and lower inflation.

Minister of state for labour Harish Rawat clarified that the raise of an additional 1% is just for this year. Next year, the earnings of EPFO will determine the rates. "We found a surplus of Rs 1,731 crore in the suspense account and we put that before the CBT to decide," the minister said.

In another important decision, the board of trustees decided to stop paying interest on "inoperative accounts", thus reducing the interest burden on account of those who use this fund as an investment destination. "The accounts which are not operated for 36 months will stop getting interest," he said.

D L Sachdev, AITUC national secretary, welcomed the decision, but said this was only a one-time security. "What the workers need is a long-term measure to be worked out and that is only possible with the government intervention," he added.

The EPFO decision will also increase the bill of many corporates which run their own PF trusts as they will have to match the new rates announced on Wednesday.