Friday, March 16, 2012


NEW DELHI: The government has cut the interest rate on employees' provident fund (EPF) savings for 2011-12 to 8.25%, ending months of indecision, but leaving nearly 6 crore employees with lower returns on their retirement savings this year compared with bank fixed deposits and other small savings instruments. The labour ministry-run Employees' Provident Fund Organisation (EPFO) declared the lower rate late Wednesday evening, two days before the Union Budget for 2012-13 is to be presented, after the finance ministry refused to allow any rate higher than 8.25%. Last year, the EPF rate was 9.5%, and this 125-basis-point decrease is the single largest cut in the past decade. "We were informed by the labour ministry that a rate of 8.25% be declared for 2011-12," said EPFO financial advisor Rajesh Bansal. Government Bites the Bullet Opposition leaders were quick to condemn the government's decision to lower the rate. "At a time interest rates are rising, this move exposes the government's insincerity towards the 'aam aadmi' it claims to represent and protect. We will definitely raise the issue in Parliament," said CPM MP Tapan Sen. In December 2011, the EPFO board of trustees chaired by labour minister Mallikarjun Kharge had recommended three EPF rates of 8.25%, 8.5% and 9.5% and left the final decision to finance minister Pranab Mukherjee. The labour ministry had lobbied hard for an EPF rate of 8.6%, to bring it on a par with the returns earned on public provident fund deposits. The government, which had put off a final decision on the EPF rate till after the state assembly elections, has now chosen to bite the bullet with the lowest proposed EPF rate on the table. In 2010-11, the EPF rate was raised to 9.5% from 8.5%, after the EPFO claimed it had discovered 'hidden reserves' of around Rs 1,700 crore. While reluctantly approving the 9.5% EPF rate last year, the finance ministry had asked the PF office to update all workers' accounts within six months and ensure there was no shortfall in income.

But the reserves were not enough to support the 1% rate hike, forcing the organisation to dip into this year's income to fulfil last year's promise. A 5.7% error in its income estimates for 2010-11 led to a Rs 510-crore deficit that was funded from this year's income. Moreover, worker accounts have not been updated. Consequently, the finance ministry has taken the view that that there is no option but to finalise a conservative rate of return for this year. The EPF rate for this year is lower than the 8.6% payable on PPF savings from December 1, 2011, and the 8.7% paid on NSCs. Risk-free bank fixed deposits are earning over 9.25% currently. "Representatives of employees on our board were aware that paying more than 8.25% would be difficult as per our income calculations. It may pinch the working class a bit, but there have also been times when we paid 12% interest on EPF while market interest rates were 8%," said EPFO's Bansal. But this argument did not find much support from union leaders.

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