Finmin Raises FY16 EPF Rate to 8.8%

Roll­back fol­lows clar­i­fi­ca­tion by labour min­istry on avail­abil­ity of funds

The Economic Times - - Front Page - Our Bureau

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.

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