EPFO rate must be cut upward of 50 points, Finance tells Labour

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AFTER QUESTIONING the tenability of an interest rate of 8.65 per cent for subscribers of the Employees’ Provident Fund Organisation (EPFO) for 2016-17 in February, the Finance Ministry is now learnt to have written to the Labour Ministry recommending a possible cut in the rate upward of 50 basis points.

In February, the Finance Ministry had sought clarifications from the Labour Ministry, mainly pertaining to the EPFO’s ability to pay an interest rate of 8.65 per cent and the payouts to be made in case of inoperative accounts. In its reply, the Labour Ministry had justified the payout.

In its latest missive recommending a reduction in the EPF interest rate, the Finance Ministry has again questioned the tenability of interest payouts by the retirement fund body, especially with regard to the liability of the central government in case the EPFO is unable to provide for the payments.

“A reduction in interest rate has been recommended to the Labour Ministry as we need to be certain about the financial performance of the EPFO. Otherwise, if there is a default by EPFO on its interest payment, then as per law the central government shall be liable and that is what has been questioned by the Finance Ministry,” said an official.

Last December, the Central Board of Trustees (CBT) of the EPFO had recommended an interest rate for 2016-17 of 8.65 per cent, the lowest in four years, for nearly 17 crore of its subscribers. As per general practice, the decision of the CBT, the governing body that manages the fund and is chaired by the Labour Minister, needs an approval from the Finance Ministry.

Labour Minister Bandaru Dattatreya had in February said that both the ministries are on the same page regarding the rate. “The Labour Ministry and the Finance Ministry (view) is the same. There is no difference on 8.65 per cent rate of interest on EPF. It is in the process and I will pursue it personally,” Dattatreya had said.

When contacted, a member of the CBT of EPFO confirmed the recommendation of the Finance Ministry for reducing the EPF interest rate, while another member said he was not aware of the development. The Central Provident Fund Commissioner, EPFO, and officials of the Finance Ministry did not respond to requests seeking comment.

Both the ministries were embroiled in a tug of war regarding the interest rate last year as well, after the Finance Ministry had approved a lower EPF rate of 8.70 per cent for 2015-16 even though the Labour Ministry had announced a rate of 8.80 per cent. After several protests by trade unions, however, the Finance Ministry reverted to the initial announcement of 8.8 per cent rate for 2015-16.

The Finance Ministry has been asking the Labour Ministry to bring the EPF interest rate in alignment with other small savings schemes as it continues to be the fixed income instrument with the highest return. The Finance Ministry has cut interest rate for all small savings schemes by 10 basis points for April-June, except interest rate on savings deposits which has been retained at 4 per cent.

According to calculations presented at the December meeting of the CBT, retaining the interest rate at last year’s 8.8 per cent would have resulted in a deficit for 2016-17 at Rs 383.82 crore. At a lower interest rate of 8.7 per cent, there would have been a marginal surplus of Rs 69.34 crore. At 8.65 per cent, the rate proposed by the CBT, the projected surplus for 2016-17 was pegged at Rs 295.91 crore.