PF accounts to get lower returns this year

Around 61 million subscribers of the Employees Provident Fund Organisation (EPFO) are likely to get lower returns on their deposits this year.

The Union ministry of finance has, for the second time, recommended an interest rate of 8.25 per cent for 2011-12; it was 9.5 per cent for 2010-11.

This was despite the ministry of labour requesting 8.6 per cent. An official with direct knowledge of the development said the finance ministry felt that was financial imprudence.

Union Budget 2012-13: Complete coverage

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It is estimated that an 8.5 per cent rate of interest would lead to a deficit in the closing balance in the Interest Suspense Account (Isa), amounting to Rs 526.9 crore (Rs 5.26 billion). If, however, 8.25 per cent was accepted, this deficit would be no more than Rs 0.24 crore (Rs 24 million).

The decision is expected to draw flak from trade union leaders, who insist on budgetary support from the government to maintain 9.5 per cent as the interest rate. This was one of the demands during the day-long general strike on February 28.

"The decision of the finance ministry should be treated as final," said a senior EPFO official, on the condition of anonymity. The decision to recommend the matter to the finance ministry was taken in early January, after the central board of trustees of the EPFO failed to reach any decision.

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In its reply, the finance ministry had recommended an 8.25 per cent interest rate. On February 20, the labour ministry wrote again to the finance ministry, to consider 8.6 per cent. The latter has reiterated its stance.

In December, the financial advisory committee of the EPFO had recommended 8.25 per cent as the interest rate.

The committee had noted it was "forced" to propose a slash in the interest rate this year, as there was a shortage of Rs 510.35 crore (Rs 5.1 billion) in the Isa.

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Further, the over-estimation of interest income by 5.7 per cent had resulted in a hole amounting to Rs 854.13 crore (Rs 8.54 billion) from interest income.

Last year, the government's approval of 9.5 per cent was subject to the condition that the accounts of the 47.2 million members' would be updated within six months.

Even so, it had clarified that any shortfall in the Isa would be adjusted in 2011-12. Since the government fell short of its estimation, it said it had no option but to decrease the interest rate.