Finmin Raises FY16 EPF Rate to 8.8%
Rollback follows clarification by labour ministry on availability of funds
New Delhi: The government made yet another concession to working-class anger on the Employees’ Provident Fund by raising the interest rate payout for the financial year that’s just ended to 8.8% from 8.7% that had been approved by the finance ministry earlier in the week.
The backpedalling follows the uproar sparked by the finance ministry scaling down the 8.8% recommended by the Central Board of Trustees (CBT) of the Employees’ Provident Fund Organisation (EPFO).
“I am happy that finance ministry has agreed to 8.8% for 201516,” Labour Minister Bandaru Dattatreya said in the Capital on Friday while announcing the higher rate.
The labour ministry had back- ed CBT’s recommendation.
A finance ministry official clarified the rollback was not under pressure but following explanation from the labour ministry that earnings for 2014-15 were sufficient to cover the recommended 8.8% interest rate on EPF accumulations.
The labour ministry has clarified that “the earnings in 2014-15 turned out to be more than the estimates and the same was used to recommend 8.8% interest rate”, said the official. “Further, it was clarified that EPFO is doing separate provisioning for possible principal and interest payouts on inoperative accounts and the same is not disbursed among active members.”
The finance ministry had justified the lower rate on the grounds the higher one raised the prospect of EPFO having to dip into its reserves. The explanation hadn’t appeased labour unions, which threatened to go on strike. The ministry had sought certain clarifications from EPFO. “They came and explained certain provisions that have been made separately,” said the ministry official.
According to finance ministry calculations, EPFO had a surplus of .₹ 1,604 crore in FY15. At the proposed 8.8% return, this will get depleted to .₹ 674 crore, hurting EPFO’s ability to deliver relatively stable returns when interest rates are falling. At 8.7%, the surplus will drop to .₹ 1,000 crore.
The finance ministry had also reasoned that there would be an additional interest payment liability because of non-operative accounts. Interest ear- ned on 9 crore inoperative accounts holding more than .₹ 35,500 crore is currently distributed among all active account-holders.
This benefit will not be available from the next year as CBT has decided to pay interest on inoperative accounts, having stopped doing so since April 1, 2011. If these account-holders are to be compensated for interest denied over the past few years, some surplus would have to be retained.
Besides, on March 31 this year, about 3 lakh accounts were awaiting updation and in the absence of this it would be difficult to ascertain the exact payout.
The latest move follows several rollbacks on EPF. Last month, the government scrapped Budget proposals to tax part of EPF withdrawals to encourage people to buy annuities. This month, it rolled back tighter withdrawal norms.
INVESTMENT IN EQUITIES
EPFO invested .₹ 6,577 crore, 5% of the investible surplus, in equities through ETFs based on the Nifty and Sensex as of March 31this year, Minister of State for Finance Jayant Sinha said in a written reply to the Lok Sabha. Sinha said the government is aware of the risks of equity investments and EPFO hasn’t put money into individual stocks. “Therefore, the Central Board of Trustees, EPF, has decided to invest only 5% of investible surplus in ETFs of Nifty and Sensex-based index,” the minister said. EPFO is permitted to put 5-15% of the investible surplus in equity and related investments.
FIXATION OF INTEREST
The interest rate on EPF accumulations is administered by the ministry of labour & employment on the recommendations of CBT. The finance ministry ratifies the rate taking into account financial sustainability and to ensure stable returns to investors.
The labour ministry had sought finance ministry’s ratification of the 8.8% rate for 2015-16. However, the finance ministry set the rate at 8.7% since there was apprehension about the use of past surplus and non-provisioning of enough funds to meet the liabilities of inoperative accounts, he official said. The finance ministry’s decision was based on pure arithmetic calculation and in the interest of all EPFO members, the official said.