The finance ministry may extend budgetary support to the Employees Provident Fund Organisation (EPFO) to ensure it offers interest comparable with other savings instruments.
A senior ministry official handling the issue in the economic affairs department told Business Standard, “We can help them through the Budget. That window is always available.”
Based on its surplus, the EPFO proposed an 8.25 per cent rate of interest for 2011-12 in a meeting of its Central Board of Trustees (CBT) in December, as against 9.5 per cent given in 2010-11. There are nearly 48 million EPF subscribers.
CBT member D L Sachdeva said a consensus could not be reached in the meeting as trade unions demanded continuance of the 9.5 per cent rate of interest and employers’ representatives agreed on 8.5 per cent for the current financial year. The labour ministry has proposed 8.6 per cent. The finance ministry will take the final call.
An official said the finance ministry would first see whether there was a possibility of the EPFO raising the interest rate from its own resources. “If that is not possible then based on fiscal space, we will take a final decision. Considering that this is a tough year, we will have to take the call.”
Sachdeva said the EPF body had been advised by CBT members to recheck and update the interest suspense account, which showed a shortfall of Rs 530 crore on the Rs 1,731 crore requirement to provide a 9.5 per cent rate of interest calculated last year.
The member said stoppage of interest to inoperative accounts could also allow the EPFO to increase the interest rate from the proposed 8.25 per cent. He stressed it was not only 1.25 per cent lower than the previous year but also less than the public provident fund (PPF) rate of 8.6 per cent and the bank fixed deposit rate of nine per cent. Notably, the returns on fixed deposits are not comparable with provident fund returns as the former are not tax-free. Trade unions were unlikely to agree to a rate below nine per cent in 2011-12, he said.
The finance ministry had recently raised the PPF rate to 8.6 per cent from eight per cent and also other small savings interest rates to bring them in tune with the rates on other instruments. Sachdeva said trade unions had demanded the ministry raise the interest rate on the Special Deposit Scheme from eight per cent to 8.6 per cent, in which about Rs 53,000 crore of EPFO money had been deposited.
The ministry normally ratifies the interest rate proposed by the CBT but as there has not been a consensus this year on the rate in the trustees’ body, all eyes are on its decision.