Just a few days after the election results were announced, the interest rate on employees' provident fund (EPF) deposits was slashed from the previous year¡¯s 8.5% to 8.1% for the financial year 2021-22. This downfall in EPF rate will adversely impact the retirement corpus of depositors, by dropping returns in the?retirement savings' kitty,
This is the lowest interest rate since 1977-78 (when the EPF rate stood at 8%), indicating that this recent fall brings EPF rates to a four-decade low.
The 8.1% interest rate was recommended by the Central Board of Trustees (CBT) after its meeting in Guwahati under the chairmanship of Union Labour and Employment Minister Bhupendra Yadav, a labour ministry statement said, as per PTI.
It said that "The Central Board recommended 8.1% annual rate of interest to be credited on EPF accumulations in members' accounts for the financial year 2021-22 (ending on March 31, 2022)."
For approval, this interest rate recommendation will now go to the Union Finance Ministry and will be notified once approved.
The EPFO paid 8% interest rate to its subscribers in both 2019-20 and 2020-21. Before that, the EPF rate was 8.65% in 2018-19, 8.55% in 2017-18 and 8.65% for 2016-17.
After the meeting, the labour and employment minister stated "This year, our Board, keeping the kind of international situation and the [volatile] condition of the stock markets, has opted to keep social security goals in mind with the investments. We cannot invest in high¨Crisk instruments, we are looking at stable returns for social security needs,¡± as per a report in The Hindu.
Moreover,?Mr, Yadav sought to downplay concerns and said he feels good to announce 8.1%?at a time when a 10-year fixed deposit with the SBI yields just around 5.4%, while returns on savings instruments like the Public Provident Fund are in the range of 6.8% to 7.1%, as per a report in The Hindu.
A CBT member reportedly 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.
While the labour ministry statement did not give reasons for cutting interest rate, it said, "the EPFO, despite following a conservative approach towards investment, has consistently generated high returns over the last many years which has enabled it to distribute higher interest to its subscribers, through various economic cycles with minimal credit risk."
Giving a hint towards a possible higher rate in future, the statement by labour ministry further mentioned "For FY 2022, EPFO decided to liquidate some of its investment in equities and the interest rate recommended is a result of combined income from interest received from debt investment as well as income realized from equity investment. This enabled EPFO to provide a higher return to its subscribers and still allowed EPFO with a surplus to act as a cushion for providing a higher return in the future also. There is no over-drawl on the EPFO corpus due to this income distribution."
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