FinMin defends lower EPF rate, cites lack of funds

Ahead of a one-day protest called by labour unions against lowering of interest rate on EPF, Finance Ministry today defended its decision, saying last year's surplus would have to be used to pay even the lower 8.7 per cent rate on Employee Provident Fund for 2015-16.
Employee unions have called a nationwide protest on April 29, against the Finance Ministry's move to fix EPF interest rate at 8.7 per cent for 2015-16, lower than 8.8 per cent sought by Employee Provident Fund Organisation (EPFO) and 8.75 paid for the previous fiscal.
A Finance Ministry source said earnings of EPFO in 2015-16 is "not even sufficient to pay 8.7 per cent interest rate."

"There was a surplus of Rs 1,604.05 crore for 2014-15. At the proposed rate of 8.8 per cent, this surplus would be reduced to just Rs 673.85 crore in 2015-16.
"Thus, the proposed rate of 8.8 per cent seeks to draw on surplus of last year. This would adversely hit maintenance of relatively stable returns to investors for the next year in a falling interest rate scenario," the source added.
Stating that earnings of EPFO in 2015-16 were not even sufficient to pay 8.7 per cent interest, the source said the ratified interest rate of 8.7 per cent would leave a surplus of around Rs 1,000 crore with EPFO for the year.

"This is still lower than the surplus of Rs 1,604.05 crore for 2014-15," he said.

While the Labour Ministry is planning to seek a review of Finance Ministry decision, trade unions, including RSS-backed Bharatiya Mazdoor Sangh have attacked the government for lowering of the rate.
Explaining the process, the source said interest rate on EPF accumulations is administered by the Labour Ministry on the recommendations of Central Board of Trustees (CBT) of EPF.
"Ministry of Finance ratifies the rates on the basis of proposal from Labour Ministry, taking into account financial sustainability and ensuring stable returns to the investors," the source said.

The Finance Ministry source said the interest income
earned on nine crore inoperative accounts, having a principal of more than Rs 35,000 crore, is not distributed among them but rather distributed among existing active account holders based on a CBT decision.
"Moreover, this windfall for exiting operative accounts will not be available from next year since CBT in its recent meeting has taken a decision to pay interest for the inoperative accounts which it stopped since April 1, 2011.
"From where would these account holders be compensated for past years when the interest earning on their investment has been used by existing active account holders?" he asked.

Also, as on March 31, around three lakh accounts are pending for updation, in the absence of which, it is difficult to calculate the exact liabilities towards them.
"The earnings of EPFO in 2015-16 itself are a result of investment made over a number of years. It clearly implies that outgoing employees may also have benefited from the investments made when they were not the members. A decent reserve/surplus amount is necessary to ensure inter- generational equity," the source added.
Labour Minister Bandaru Dattatreya had on Monday told Lok Sabha that Finance Ministry approved a 8.7 per cent interest rate for over five crore subscribers of the Employees' Provident Fund Organisation (EPFO).

"The (EPFO's apex decision-making body) CBT at its meeting held in February had proposed an interim rate of interest at 8.8 per cent to be credited to the accounts of EPF subscribers for 2015-16. The Finance Ministry has, however, ratified an interest rate of 8.7 per cent," the minister had said.
This is probably the first time when Finance Ministry has not given concurrence to the interest rate on EPF as decided by the CBT, which is headed by the labour minister.
The latest move comes on the heels of government withdrawing two proposals pertaining to EPF. Buckling under pressure, it rolled back its move to tax EPF as well as tighten withdrawal norms.

The EPFO had provided 8.75 per cent rate of interest in 2013-14 and 2014-15, which was higher than 8.5 per cent in 2012-13 and 8.25 per cent in 2011-12.
Its estimates, worked out in September, projected that the body can easily pay 8.95 per cent rate of interest as it would leave a surplus of Rs 100 crore.
The EPFO pays rate of return to subscribers on the basis of returns it generates from its investments.