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Govt set to force EPF rate cut

P Vaidyanathan Iyer

The finance ministry is set to reject the Central Board of Trustees' final recommendation that the interest rate on employees' provident fund be maintained at 9.5 per cent. "The interest rate will be fixed at 9 per cent," said an official.

Senior government officials told Business Standard the board's two-point explanation in its latest missive to North Block was that there would be a surplus of about Rs 1.15 billion in the suspense account even after the 9.5 per cent interest payout and that the higher rate was justified since EPF was for the employees from the lower strata of the society.

Hence, the interest rate on EPF should not be compared with that on the public provident fund and the gross provident fund, the board said.

Government officials said the board, however, did not explain how it would be able to generate returns, which were higher than the 9.5 per cent it wished to offer.

"The interest rate on the special deposit scheme and small savings instruments has already been cut to 9 per cent," said an official. The average interest income on the EPF corpus stood at 9.4 per cent now, officials said.

The interest earnings for the current year, including that in the suspense account, stand at Rs 57.46 billion. While a 9 per cent interest payout will leave a surplus of Rs 4.11 billion, there will still be a surplus of about Rs 1.15 billion if the interest rate is maintained at 9.5 per cent.

Officials said the rules of the Employees Provident Fund and Miscellaneous Provisions Act allowed withdrawal from the interest suspense account. However, it specifies that in setting the interest rate, there should not be any overdrawal from the account.

"The funds in the suspense account cannot be treated as reserves since they are actually unclaimed funds," sources pointed out.

While 80 per cent of the EPF corpus is invested in SDS, the balance 20 per cent is invested in specified market instruments. Officials said up to 2 per cent could also be invested in equity funds.

With the markets in a tailspin, the funds could have eroded in value, they said. "The finance ministry does not know whether the board has provided adequate risk cover and built in safeguards for the other investments," the official added.

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