Day After: Interest Rate on Provident Fund for FY22 Cut to 4-Decade Low of 8.1%

New Delhi: Interest rate on employees' provident fund (PF) deposits on Saturday was proposed to be cut to a four-decade low of 8.1% for the current 2021-22 fiscal from 8.5% in the previous year, sources said.

This is the lowest interest rate since 1977-78 on deposits that employees make towards their retirement fund. Interest rate on employees provident fund that year stood at 8%.

The interest rate for the current fiscal year ending March 31 was set by the retirement fund body EPFO for its about five crore subscribers.

"The Employees' Provident Fund Organisation's (EPFO's) apex decision making body Central Board of Trustees has decided to provide 8.1 per cent rate of interest on Employees Provident Fund (EPF) for 2021-22 in its meeting held on Saturday," a source said.

 The EPFO paid 8.5% interest rate to its subscribers in 2020-21, the same as in the previous year. The EPF rate was 8.65% in 2018-19 and 8.55% in 2017-18.

Provident fund savings are mandatory under the Employees Provident Funds and Miscellaneous Provisions Act, 1952. At least 12% of an employee's basic salary is compulsorily deducted to be saved in provident fund, while an employer co-contributes an equal amount.

Sources added that interest rates are fixed based on the earnings of the retirement fund body on the deposits it has. While the corpus has gone up by 13%, interest income is up only 8%.

The COVID-19 pandemic has strained EPFO's earnings. EPFO delayed payments for 2019-20 and paid the interest in two installments, deriving from two sources of its investments -- 8.15% from debt investments and 0.35% from the equity portfolio.

Pressured earnings forced the retirement fund manager to revise down the interest rates payable to depositors in some preceding years.

For instance, during 2017-18, the organisation paid 8.55% interest rate. In 2016-17, the interest rate was higher at 8.65%.

EPFO has a surplus of around Rs 450 crore after paying at a rate of 8.1%. Employee representatives sought higher interest rates but the Central Board of Trustees (CBT) settled for 8.1%.

A member of the CBT said the interest rate setting reflects the state of the Indian economy and the difficulty the EPFO faces in generating returns from a sizeable corpus.

The EPFO invests 85% of its annual accruals in debt instruments, including government securities and bonds, and 15% in equity through ETFs. The earnings from both debt and equity are used to calculate the interest payment.

The EPFO has liquidated Rs 12,785 crore worth equity investments in exchange-traded funds (ETFs) and will use capital gains of around Rs 5,529 crore from it for the FY22 EPF interest payout.

The 8.5% interest rate on EPF deposits for 2020-21 was decided by the CBT in March 2021.

It was ratified by the finance ministry in October 2021 and thereafter, EPFO issued directions to field offices to credit the interest income at 8.5% for 2020-21 into the subscribers' accounts.

Now, after the CBT decision on Saturday, the interest rate on EPF deposits for 2021-22 will be sent to the Ministry of Finance for concurrence. EPFO provides the rate of interest only after it is ratified by the government through the finance ministry.

In March 2020, EPFO had lowered the interest rate on provident fund deposits to a seven-year low of 8.5% for 2019-20, from 8.65% provided for 2018-19.

The EPF interest rate provided for 2019-20 was the lowest since 2012-13, when it was brought down to 8.5%.

EPFO had provided 8.65% interest rate to its subscribers in 2016-17 and 8.55% in 2017-18.

The rate of interest was slightly higher at 8.8% in 2015-16. It had given 8.75% rate of interest in 2013-14 as well as 2014-15, higher than the 8.5 for 2012-13.

The rate of interest was 8.25% in 2011-12.