Ahead of the festival season, retirement fund manager EPFO's Trustees today raised interest rate on provident fund deposits by one percentage point to 9.5% that will benefit nearly 4.71 crore employees.
This is the highest interest rate declared by the EPFO in five years.
"We have decided to give 9.5% rate of interest to subscribers during the current financial year on their contributions. For over four crore subscribers this is a big gift from EPFO Trustees," labour minister Mallikarjun Kharge told reporters after meeting of the trustees.
The decision would put an additional burden of Rs1,600 crore on the EPFO, the minister said, adding that it would be met from the surplus of over Rs1,731 crore in the interest suspense account.
The decision, according to bankers, could see diversion of savings towards provident funds as the difference between the fixed deposit rates and PF rates would encourage savings towards the latter.
Currently, the State Bank of India and the ICICI bank give maximum interest rate of 7.75% on long term fixed deposits for up to 10 years.
Commenting on the decision, a leading industry chamber Ficci said this could put pressure on interest rates of competing saving instruments and would have negative implications for the government finances.
Assocham said that high rate of interest rate will not be sustainable either by the EPFO or by exempted trust on the basis of investment pattern decided by the government. "It is doubtful that this high rate of interest could be sustained," the industry body said.
The EPFO Trustees have said that they have decided not to invest in the stock markets and would continue to follow the existing investment pattern.
"We had received a letter from the finance ministry asking for parking of a portion of EPFO funds in the stock market. We have received huge opposition from the CBT members who oppose the idea of investing in stock markets," Kharge said.
The EPFO maintains a huge corpus of over Rs3,00,000 crore, whereas all recognised PFs managed by it have accumulated funds to the tune of Rs2,00,000 crore.
About the inoperative accounts, the Minister said that the Board has decided that no interest would be credited in such accounts with effect from April 1, 2011.
At present, around Rs10,000 crore of unclaimed money is lying in more than 2.9 crore inoperative accounts of the EPFO. About 1.05 crore inoperative accounts, which constitutes 34.58% of all such subscribers, have less than Rs500.
All those accounts where no subscription has come for three years are inoperative accounts. EPFO spends about Rs50 crore on maintaining these accounts.
Kharge said, "EPFO would stop crediting interest in all inoperative accounts which have not received contributions for the past 36 months with effect from April 1, 2011. But all holders of such accounts would be allowed to withdraw their money."
About the overhauling of the Employees' Pension Scheme 1995 managed by EPFO, the minister said, "We have deferred the decision and it would be discussed in the next meeting."
"We have circulated the report of the expert committee among all members and it would be discussed only after they read it," he added.
The government constituted committee, headed by former additional labour secretary SK Srivastava, has proposed a provident fund-cum-annuity scheme in which two accounts would be maintained for each member - a PF account (PFA) and an Annuity Contribution (or pension) Account (ACA).
The expert group had submitted its report last month.
The decision to raise the interest to 9.5% for this fiscal was in general welcomed by the trade unions.
However the Bhartiya Mazdoor Sangh secretary and an EPFO trustee BN Rai said that had the past accounts checked thoroughly earlier the hike could have been announced well in advance.
"The accounts are not being maintained correctly. The amount of over Rs1,700 crore found in the Interest Suspense Account, could go up even further if these are checked properly," he added.
All India Trade Union Congress general secretary and a Parliamentarian Gurudas Dasgupta welcomed the raising of EPF interest rate by a percentage point. It a positive move, he said. National vice-president of Indian National Trade Union Congress Ashok Singh also welcomed the move.
Secretary Centre of Indian Trade Unions, Dipankar Mukherjee said, "As these are social security schemes, there should be budgetary provisions on giving interest rate rather than depending on EPFO corpus."