EPF Rate hiked to 8.65%
Employees’ Provident Fund Organisation has increased Central Board of Trustees decides to hike the rate by 10 basis points the interest rate on employee’s provident fund (EPF) i.e to 8.65 per cent for the current financial year (2018-19). The increase in EPF interest rate from 8.55 per cent in financial year 2017-18 is expected to benefit six crore subscribers of the provident fund scheme.
How EPF hike will benefit Employees?
Accordingly, an EPF balance of ₹10 lakh, which would have earned ₹85,500 in the previous fiscal, will earn ₹86,500 in the current fiscal. A higher rate not only puts more money in your account in the short term, over a long period it can also compound to make a significant difference. Besides, the EPF interest is tax-free.
The employer and employee contribute 12% each of the basic salary and dearness allowance to the pension fund every month. Out of the employer’s contribution, 8.33% (up to a wage ceiling of ₹15,000) is credited to the Employees’ Pension Scheme, which does not earn any interest.
The higher rate brings cheer on two counts. First, this means more money in your account and, second, EPFO’s decision to put 15% of the incremental corpus in equities through exchange-traded fund (ETFs) is yet to be implemented from a subscriber’s standpoint. This means that the hike in interest rate is applicable on the full corpus, including on the amount invested in equity.
One part of the corpus will earn the annual interest rate, while the balance ETF units will earn returns as per the performance of the ETF portfolio companies.
- EPFO will have a surplus of Rs 151 crore as on date after doling out higher interest rates. Finance ministry will have to give its go ahead to the interest rate declared by EPFO following which it will be notified by the labour ministry.
- The CBT is a tripartite body with representatives from the government, employers and trade unions headed by the labour minister. It is the apex decision-making body of the EPFO. The 8.65% rate is higher than that available on government small savings schemes, the return on which is benchmarked to market rates.
- EPFO has an active subscriber base of more than 60 million and manages retirement savings of over Rs 11 lakh crore.
- The EPFO provided a five-year-low rate of interest of 8.55% for FY18. It pegged the rate at 8.65% in FY17 and 8.8% in FY16. It provided 8.75% interest in FY14 and FY15. The rate of interest was 8.5% in FY13.
- Thursday’s rate hike is seen by many as an attempt by the government to encourage salaried class as EPF is the mainstay of their saving needs and is one of the most widely-used saving instruments.
- The interest rates on small savings instruments such as PPF and NSC are linked to the G-sec yields, whereas the EPF interest rate is decided by the government depending upon the income it generates predominantly through investments in government securities.
- The best part is we are not running a deficit, but it would have been better to have a bigger surplus as a cushion for next year. But you have to see things in context, and it’s an election year.
- Last year, when EPFO announced an 8.55% interest rate a five-year low then in 2016-17, after we paid an interest rate of 8.65%, EPFO had a surplus of ₹695 crore and this year (2017-18), after we reached a rate of 8.55%, the surplus was ₹586 crore, indicating strained finances were the reason behind a lower payout.
- The hike in the EPF interest rate makes it one of the most rewarding savings schemes. In 2018, the average interest rate of the Public Provident Fund and the National Savings Certificate was 7.7%.
- Overall, EPFO manages a corpus of over ₹11 trillion. In 2017-18, it had fresh accruals of ₹1.31 trillion. In the year ending March 2019, the annual deposit is pegged at ₹1.46 trillion. From the annual deposits, the fund manager invests 15% in equity and the rest in debt instruments, including government and corporate bonds.
- The EPFO rate hike needs the finance ministry’s approval. Though CBT took a call on the interest rate, it shelved a decision on another key issue hiking the minimum assured pension from the present ₹1,000 to ₹2,000.
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