NewDelhi March 5 : The Employees’ Provident Fund Organisation (EPFO), the state-run retirement fund manager, on Thursday announced an 8.5% interest on provident fund deposits for 2020-21, keeping a widely watched working-class metric of savings unchanged from last year.
The decision to not lower interest rates is a welcome move for India’s nearly 50 million EPFO subscribers, for whom a provident fund is often the only mode to save up for retirement.
‘The EPFO has decided it will pay an 8.5% interest on deposits based on the current position of earnings and deposits of the organisation,’ Virjesh Upadhyay, a board member of the EPFO, told HT soon after a meeting of the EPFO’s central board of trustees held in Srinagar Thursday.
According to prevailing EPFO norms, at least 12% of an employee’s basic salary is compulsorily deducted to be saved in provident fund, while an employer co-contributes another 12%.
Subscribers will be paid an 8.5% interest during 2020-21 on these deposits.
Finance minister Nirmala Sitharaman, in the Union Budget presented in February, had announced that interest on employee contributions to provident fund of over ₹2.5 lakh per annum would be taxed, starting April 1. She had said that the tax-exempted deposit limit was set at ₹2.5 lakh.
In March last year, the retirement fund manager had disappointed subscribers by a downward revision of interest rates on PF deposits to 8.5%, a seven-year low.
‘Earnings of the EPFO are facing different situations in the financial markets. The EPFO’s earnings for 2020-21 are pegged at ₹65,000 crore and it will be comfortably able to pay 8.5% this year too,’ Upadhyay said.
The Covid-19 pandemic had pressured the EPFO’s earnings and delayed payments for 2019-20. This was paid in two instalments, deriving from two sources of the EPFO’s investments: 8.15% from debt investments and 0.35% from its equity portfolio.
Pressured earnings have forced the retirement fund manager to lower the interest rates payable to depositors in some preceding years. For instance, during 2017-18, the organisation had paid an 8.55% interest rate. In 2016-17, the interest rate was higher at 8.65%.
According to the labour ministry’s latest statement of payroll data, the number of new subscribers of the EPFO, which also gives an estimate of formal-sector employment growth, rose by 24% to 1.254 million in December 2020 compared to a year before.
Previously, interest accrued from an employee’s provident fund (EPF) was exempt from tax. ‘The decision of the Union Budget to fix the tax-exempt limit on EPFO deposits from the employee’s share and impose a tax above deposits of ₹2.5 lakh is aimed more at curbing disproportionately high voluntary savings by high-income individuals,’ said Bikram Dhamija, a partner at Compass Tax PLC.