Your Provident Fund Will Get 8.5% Interest In Installments; EPFO Under Stress?

On September 9, the central board of the Employees’ Provident Fund Organization (EPFO) said it will pay 8.5% interest to formal sector workers, for the previous fiscal year, FY 2019-2020.

This interest will be paid in two installments, although the board hasn’t specified the manner of payouts yet. 

Read on to find out more…

8.15% Interest Will Be Paid, What About Remaining 0.35%?

The decision was taken at a meeting of the EPFO’s central board of trustees (CBT), headed by Labor and Employment Minister Santosh Kumar Gangwar.

The labor-ministry controlled board said in a note, “It would comprise 8.15% from debt income and the balance 0.35% (gains) from the sale of ETFs (exchange-traded funds), subject to their redemption by 31 December 2020.” 

The phrase ‘subject to redemption’ remains a bit sketchy as it doesn’t explain whether the remaining 0.35% is subject to market risks. A board member seeking anonymity, “Today, it was recommended again for 8.5% interest rate as announced in March 2020. But you may assume a small degree of uncertainty in the 0.35% interest rate as the sale of ETFs will happen preferably in a relatively better market condition.”

8.15% is lower than the 8.5% as decided in March 2020.  The 8.5% was also at a seven-year low as compared to 8.65% credited in FY 2018-2019.

Prior to the COVID-19 pandemic and the resultant economic crisis, the EPFO’s projections had shown that an interest rate of 8.5% in March would have left the organization with an additional Rs 700 crore.

EPFO’s ETF investments made in 2016 are redeemable in FY20 and the board is expected to receive around Rs 2,800 crore as capital investments. “The exact amount of return will be determined in December when the ETF units are planned to be sold,” the CBT member said. The remaining 0.35% payout will happen in December 2020, if the EPFO is able to redeem this amount. 

Bad Market Conditions, Income Loss, And More!

The EPFO’s income at the end of March this year was between ?2,700 crores and ?3,500 crores from dividends and sale of ETFs. This income decline can be cited to bad market conditions, said an EPFO official requesting anonymity. 

If it gives an interest of 8.5% the board can witness a loss of approximately Rs 2,500 crore in FY20. The EPFO credits interest to around 190 million accounts.

If the remaining 0.35% interest isn’t credited by EPFO, the subscribers will get the lowest return since 1977-78 when it handed out interest of 8%. 

In FY20, the EPFO’s investments in the equity markets accrued negative returns in FY20, the official data presented in the CBT meeting showed. The investments yielded a return of minus 8.3% for FY20 as opposed to 14.7% in FY19. 

What Does EPFO Have to Say?

The CBT has recommended that the organization should take into ‘account such capital gains in the income of FY20 as being an exceptional case’. It means the sale proceeds that will happen before 31 December will be credited to the previous 2019-20 earnings, a departure from the general practice.

Virjesh Upadhyay, a board member of the EPFO and general secretary of the Bharatiya Mazdoor Sangh said, “There is no going back on the 8.5% rate for FY20, but the current situation has pushed us to go for two installments. Some of the investments could not be encashed due to the bad market situation. Hence, this new formula,”

All India Trade Union Congress National Secretary Sukumar Damle said a staggered-payment plan related to the interest rate was not notified to members in advance. He said, “This agenda was discussed and brought to the table at the last moment during the meeting. The employees’ representatives were shocked to know about the decision to credit interest rates in installments.”

The interest rate will be notified after getting approval from the finance ministry.