EPFO retains interest rate at 8.5% for FY21

As many as 60 million subscribers of the Employees’ Provident Fund (EPF) have got a major relief with the retirement fund body retaining the annual interest rate at 8.5 per cent for 202021, buoyed by healthy returns on its equity investments.

Even though the current interest rate is the lowest since 2012-13, the decision, taken by the Central Board of Trustees of the Employees’ Provident Fund Organisation at a meeting in Srinagar on Thursday, came as a pleasant surprise because there was talk of a cut in the rate.

“This is despite the fact that the EPFO has consistently followed a conservative approach towards investment, putting the highest emphasis on the safety and preservation of the principal. The risk appetite of the EPFO is very low, since it involves investing the poor man’s retirement savings also,” an official statement said.

From 2015-16, the EPFO started investing in equity through exchange traded funds (ETFS) based on the Nifty50 and the Sensex.

The investment in equity assets started from 5 per cent for FY15 and subsequently went up to 15 per cent of the incremental portfolio.

For FY21, the EPFO decided to liquidate its investment in equity, and the interest rate recommended is a result of the combined income from interest received from debt investment as well as income realised from equity investment, it said. This has enabled the EPFO to provide higher returns to its subscribers. There is no over-drawl on EPFO corpus due to this income distribution.

Experts say maintaining the return on EPF at 8.5 per cent is a very positive development in the current scenario. “Interest rates have been falling during the larger part of FY21, barring the few weeks after the Budget. The yield on the 10-year government bond had fallen to around 5.75 per cent level. In such an environment, to keep the interest rate of EPF unchanged is very much in the interest of long-term savers,” said Ankur Maheshwari, chief executive officer, Equirus Wealth Management.

Attractive despite changes

Earlier, EPF was an entirely exempt-exempt-exempt (EEE) instrument. But in the Budget, contributions above ~2.5 lakh were made taxable at slab rate.

“This has made EPF/VPF (Voluntary Provident Fund) contributions above ~2.5 lakh slightly unattractive compared to pre-budget times. But even post-tax, a return of 5.85 per cent for investors in the highest tax bracket remains attractive,” said Dhawan. He added that the tax-free limit of ~2.5 lakh imposed in the Budget will affect only a small set of subscribers—those who have a basic salary above ~1.75 lakh.