EPF continues to beat inflation even with interest rate at four-decade low

The scheme also offers better returns than other most other investment avenues

The Employees' Provident Fund Organisation (EPFO) may have disheartened nearly 65 million subscribers by slashing the interest rate for 2020-21 to a four-decade low of 8.1 per cent from 8.5 per cent in the previous year. But the return still beats the inflation rate. This was not the case in the fag end of the UPA regime, despite the interest rate being in the range of 8.5-8.75 per cent.

Every since, though the interest rate on EPF has been fluctuating, the retirement fund scheme has never given negative returns to its subscribers in real terms (where the returns are adjusted for inflation).  

During the last two years of the UPA regime--2012-13 and 2013-14--the EPF delivered negative returns of 1.7 and 0.74 per cent. This was so since the consumer price index (CPI) inflation rate was in double digits in 2012-13 and near 9.5 per cent in 2013-14.

Since then, CPI inflation has never gone so high. Anyway, from 2016-17, the RBI and the government have entered into the Monetary Framework Agreement, according to which the central bank's monetary policy committee (MPC) has the mandate to keep the inflation rate at 2-6 per cent.

But even prior to that, in 2014-15 and 2015-16, the CPI inflation rate came down to 5.97 per cent and 4.97 per cent. Part of the reason was external--international prices of petroleum. The Indian basket of crude averaged $107.97 a barrel during 2012-13 and $105.52 the next year. However, it came down to $84.16 during 2014-15 and further to $46.17 the next year.

In fact, Prime Minister Narendra Modi tried to cash it in during the BJP's campaign in the Delhi assembly elections in 2015 when he had said, "Tell me, haven't petrol prices come down? Aren't you saving money? People say that all this has happened because Narendra Modi is lucky. If my luck can benefit the country, why do you need to elect an unlucky government?"

Global prices never crossed $100 a barrel after August 2014 except for the last week of February and in 2022, amid Russia's invasion of Ukraine in the first two months of the current fiscal year. They are likely to remain so in March and April.

The refrain was that EPF returns have always beated inflation after 2013-14 even as EPF interest rates have dropped since 2015-16.

A government note said, "After FY13 and FY14, while CPI has been kept under control, owing to pro-active government policies, the interest rate on EPFO has, by and large, been kept constant. Thus, the employees have been getting positive real returns on their investments."

The inflation-adjusted EPF return in 2021-22 is the lowest in the Narendra Modi regime so far. However, it is still higher than those offered by other schemes.

Finance minister Nirmala Sitharaman also said the EPF rate during 2021-22 was still higher than rates offered under other fixed-income schemes.

Comparing the EPF rate to other schemes, she said Sukanya Samriddhi Yojana offers 7.6 per cent interest, Senior Citizen Saving Scheme 7.4 per cent, Public Provident Fund (PPF) 7.1 per cent and State Bank of India’s 5-10 year fixed deposits 5.5 per cent. The Central government securities’ average rate across certain maturities is 6.28 per cent, she said.

Other schemes also offered lower returns than EPF in real terms over the years. For instance, the popular PPF scheme was more attractive than EPF during 2012-13. But that was never the case under the Modi regime. For the first 11 months of 2021-22, the PPF would be giving 1.73 per cent returns in real terms against the 2.73 per cent provided by EPF. The final number would be known only next month when March inflation numbers would be released.

Ritika Chhabra, economist and Quant Analyst at Prabhudas Lilladher, said despite the recent cut in interest rates of EPF from 8.5 per cent to 8.1 per cent, EPF still offers higher tax-free returns to investors among comparable schemes with similar risk levels.

"However, investors should look at other investment alternatives beyond the mandatory EPF contributions to secure inflation-beating returns and build a comfortable retirement corpus," she advised.

Investors who are in their 30s and 40s can have exposure to equities, which is known to be an inflation-beating asset class if held for a minimum of 5-7 years, Chhabra said.

"Older investors can consider NPS as a market-linked alternative, where equity exposure can be capped depending on one’s risk appetite," she argued.

National pension system (NPS) also gives inflation-beating returns under its various portfolios. In fact, its returns are higher than even EPF (See Table: EPF and PPF versus inflation rate). However, the two schemes are not comparable. EPF is completely tax free, while NPS is tax exempt only to the extent of minimum 40 per cent which goes to buying annuity. Anything above that is taxable.

Besides, returns on NPS are based on the net asset value (NAVs) which keep fluctuating.  

Table: EPF and PPF versus inflation rate

Year	CPI Inflation rate (%)	EPF rate (%)	Real EPF rate (%)	PPF rate (%)	Real PPF rate (%)
2012-13

10.20* 8.50 -1.7 8.8 -1.4 2013-14 9.49* 8.75 -0.74 8.7 -0.79 2014-15 5.97 8.75 2.78 8.7 2.73 2015-16 4.91 8.80 3.89 8.7 3.79

2016-17

4.54 8.65 4.11 8.5@ 3.96 2017-18 3.58 8.55 4.97 7.72@ 4.14 2018-19 3.43 8.65 5.22 7.8@ 4.37 2019-20 4.76 8.50 3.74 7.92@ 3.16

2020-21

5.05** 8.50 3.45 7.1@ 2.05 2021-22  5.37# 8.10 2.73 7.1@ 1.73

* Old series with base year of 2010
** Last ten months since data not available for April and May due to Covid
# first 11 months
@ From 2016-17 quarterly PPF returns started to be declared, yearly returns are calculated as average of those quarterly returns

Table: Returns offered by NPS schemes

Entity	Return of Central govt scheme*	Return of state govt scheme@	Return of corporate scheme on pattern of central govt#	Average annual inflation since 2012-13
SBIPF	9.89	9.58	9.69	5.73
LICPF	9.68	9.66	9.78
UTIRSL	9.65	9.62	-

* Since inception onn April 1, 2008

@ Since inception on June 25, 2009

# Since inception in November, 2012