The finance ministry has approved an 8.5% return on employees’ provident fund (EPF) deposits for 2020-21, a move that will impact over 6.4 crore subscribers. The rate was the same for 2019-20. The labour ministry will now notify the interest rate before the EPFO starts crediting the same into individual accounts. The entire exercise may take a maximum of 30 days to complete from the date the rate is notified, a senior EPFO official said.
EPFO’s highest-decision making body, the Central Board of Trustees (CBT), had in March suggested the rate. Keeping a small amount as surplus, EPFO distributes each year the lion’s share of its income from investments as returns to its subscribers on their accumulated deposits. EPFO does not take money from the exchequer for interest pay-out. On an annual basis, it receives approximately Rs 1.3 lakh crore as subscription. It invests the accumulated corpus, now at over Rs 15.5 lakh crore, in debt and equity instruments in the ratio of 85:15.
At 8.5%, EPFO will have to fork out around Rs 70,000 crore as interest to its subscribers for 2020-21. The retirement fund body will still have Rs 1,000 crore as surplus. The interest rate for 2019-20 was also same at 8.5%, which, though a seven-year low, was way higher than the returns small saver could get under any other fixed-income schemes.
Along with PPF and the Sukanya Samriddhi Account meant for parents of girl children, EPF is one fixed-income instrument that is completely tax-free under the exempt-exempt-exempt (EEE) regime.
Of course, thanks to a proposal in the FY22 Budget, effective April 1, 2021, the interest on employees’ contribution to EPF above Rs 2.5 lakh a year will be taxed at the marginal income tax rate; however, barely 1% of the EPF subscribers will be impacted by the decision.
Since 2015, the EPFO has been investing in exchange-traded funds, to build up an equity portfolio and this has enabled it to fetch higher returns. It is hoping to increase the returns in 2021-22, pinning hopes on a rising market.
Over the years, the EPFO has been able to distribute higher income to its members, through various economic cycles with minimal credit risk, thanks to relatively high interest rates and compounding. This is despite the fact that EPFO has consistently followed a conservative approach towards investment, putting highest emphasis on the safety and preservation of principal first approach. Risk appetite of EPFO is very low.