Employees who contribute to the Employee Provident Fund Organisation (EPFO) are set to their savings grow as the labour ministry on Monday hiked the interest rates from 8.50% for 2012-13 to 8.75% for this fiscal.
The move, however, will leave the fund with a deficit of Rs 610 crore and perhaps add to the fiscal deficit further. As per the budget estimate of this financial year, the fiscal deficit is already estimated to be Rs 5.42 lakh crore.
Most critics see this as a political gimmick in view of the 2014 general elections.
EPFO that manages close to Rs 6 trillion, has an estimated income of Rs 20,796.96 crore for the current fiscal.For this financial year, the interest rate was expected to remain unchanged at the previous year’s level of 8.5%. At the unchanged rate estimate of 8.50%, the organisation would have had a surplus of Rs 56.96 crore but with the revised 8.75%, EPFO would be in the negative.
Between financial years of 2005-06 and 2013-14, this is the second highest interest rate being paid out. In 2010-11, the EPFO had paid an interest rate of 9.50%. However, this high rate (of 9.50%) was on the back of a surplus Rs 2000 crore ‘discovered’ after a revaluation of interest suspense account since 1952.
In the previous two financial years, interest rates stood at 8.50% (2012-13) and 8.25% (2011-12) and the 25bps hike came in as a pleasant surprise to the salaried middle class.
“We have recommended the new rate to the government for 2013-14,” said labour minister, Oscar Fernandes on Monday. A formal approval from the finance ministry is awaited after which the new rate would become effective.
The government revises EPF interest rates every year depending on the revenues made by EPFO on its previous years deposits.
“No doubt this announcement will bring a cheer to millions of provident fund subscribers as it brings the rate of interest earned closer to the rate of interest offered by banks on fixed deposits.
Yet the concern will be the pressure that this move would put on the exchequer for funding of the additional interest,” said Sonu Iyer, Partner & National Leader - Human Capital Services, Ernst & Young.
The interest rates offered by banks on a 12- 15 month deposits ranges between 8% and 9.25%, depending on the bank.
A 12% contribution from your basic salary is mandatory for those who have a basic salary of up to Rs 6500. But contribution is voluntary for people who have a higher basic salary of more than Rs 6,500. As of fiscal 2012, EPFO has 8.55 crore registered subscribers.