EPFO retains an interest rate of 8.50% to its subscribers for FY 20-21

The Central Board of Trustees, Employees Provident Fund (EPF) held a meeting in Srinagar, Jammu and Kashmir under the chairmanship of Shri. Santosh Kumar Gangwar, Union Minister of State for Labour & Employment (Independent Charge), where an 8.50% annual interest rate was recommended to be credited on EPF accumulations on members’ accounts for the financial year 2020-21. The Employees Provident Fund Organisation (EPFO) has around five crore active subscribers.

The EPFO has consistently generated returns at 8.50% since FY 2014. It provided an interest rate of 8.5% for FY 2019-20 and 8.65% for FY 2018-19. The Ministry of Labour stated that after the interest rate is notified officially in the government gazette, it will credit the interest rate into the members’ accounts.

All along, it has been able to distribute higher income to its members with minimal credit risk through various economic cycles. The interest rate of EPFO is higher than other investment avenues available for subscribers. The EPFO maintains a high-interest rate despite consistently following a conservative approach towards investments and placing a considerable emphasis on the safety and preservation of the principal first approach.

The SBI fixed deposits offer interest of 5.4% with a maturity period of 5-10 years. The SBI fixed deposits will earn an annual return of 3.8% post-tax for people in the 30% tax slab. The Public Provident Fund (PPF) gives 7.1% on deposits, but the investment is capped at Rs.1.5 lakh per annum. The EPFO deposits will effectively earn annual returns of over 11% due to the current tax-free status for its subscribers in the 30% tax slab.

The EPFO started investing in equity through exchange-traded funds based on the NSE 50 and BSE 30 indices during 2015-16. Initially, the investment in equity assets was 5% for 2015-16 and subsequently went up to 15% of the incremental portfolio. 

The interest rate of 8.50% recommended by the EPFO for FY 20-21 results from combining income from interest received from debt investment and income realised from equity investment. Thus, the EPFO provides a higher return to its subscribers while maintaining a healthy surplus acting as a cushion to provide a higher return in the future. Even after the income distribution, there will be no overdrawn on the EPFO corpus with a surplus of around 300 crores.

Both the employer and employees contribute 24% of the basic salary plus dearness allowance towards EPF every month. An employee can withdraw EPF after his retirement, i.e. after 55 years. However, an employee can withdraw 75% of the EPF corpus after one month of unemployment. The employee can withdraw the remaining 25% if he/she remains unemployed in the next month or transferred to the new EPF account after getting new employment. 

When an EPF subscriber withdraws EPF in the final settlement, and there is no notification of the interest for the current year, the interest will be credited to the subscriber based on the interest declared for the immediately preceding year. If the subscriber withdraws the EPF in the current year, then the interest will be credited from the beginning of the year till the last date of the previous month of final settlement withdrawal.

The EPFO grants a significant gain to subscribers with a high-interest rate. Since EPFO invests in a person’s retirement savings, the risk appetite is low. The EPFO’s assured fix return approach, along with the tax exemptions, makes it an attractive choice for investors. The EPF is a substantial social security measure in the form of provident fund, insurance scheme and pension.

For any clarifications/feedback on the topic, please contact the writer at mayashree.acharya@cleartax.in

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