Why are EPF interest rates cut for FY 2021-22?

The Employees Provident Fund Organisation (EPFO) has cut interest rates from 8.5% in FY 2020-21 to 8.1% in FY 2021-22. It is the lowest in more than four decades since the EPFO credited interest rates of 8% in 1977-78. Moreover, the Finance Minister clarified that the EPF rates are above the rates of other pension organisations. Why did the EPFO slash EPF interest rates for FY 2021-22?

EPFO CBT recommends an EPF interest rate of 8.1% for FY 2021-22

The EPFO Central Board of Trustees (CBT) recommended an 8.1% EPF interest rate for FY 2021-22. It is considerably higher than the SBI 10-year fixed deposit yields of around 5.4%. Moreover, the returns from small savings schemes such as PPF, NSC, etc., range from 6.8% to 7.1%. 

The central trade union representatives on the EPFO board criticised the move of slashing EPF rates from 8.5% to 8.1%, citing rising retail inflation. However, the EPFO Central Board of Trustees, keeping in mind the impact of the Russian invasion of Ukraine and the volatile Indian stock markets, opted for an EPF rate cut. 

The EPFO doesn’t want to invest EPF subscribers’ money in high-risk instruments and focuses on stable returns for social security needs. Moreover, the EPFO provides the EPF rates only after the approval of the Government through the Ministry of Finance. 

Why are EPF interest rates slashed for FY 2021-22?

EPFO fixes the EPF interest rate depending on the earnings from its deposits. However, while the EPF corpus has risen by 13%, the interest income has gone up by 8%. 

The EPFO invests 85% of its assets in debt instruments such as government securities. It infuses the remaining 15% in equity instruments through Exchange Traded Funds (ETFs). The earnings from equity and debt investments calculate the EPF interest payments. 

The EPFO earned an income of Rs 76,768 crore in this financial year against Rs 70,000 crore in FY 2020-21. It was possible because the fund managers of the EPFO offloaded some of the fund’s equity and bond holdings before the Russian invasion of Ukraine. Typically, equity and bond holding is liquidated in the last month of the financial year. 

EPFO focuses on the safety of investments and follows a conservative approach rather than investing heavily in risky financial instruments. For instance, the EPFO liquidated equity instruments worth Rs 12,785 crore and could use capital gains of around Rs 5,529 crore for the FY 2021-22 EPF interest payout. 

It led to an annualised rate of return of 13.91% on this investment, which is the highest in the last three years. Moreover, the EPFO redeemed Air India’s Non-Convertible Debentures (NCDs) from its portfolio. It helped the EPFO realise Rs 8,944 crore against a face value of Rs 7,772.5 crore. 

The EPFO has a surplus of Rs 450 crore even after paying EPFsubscribers an interest rate of 8.1% for FY 2021-22. It serves as a financial cushion during times of geopolitical stress and helps EPFO offer subscribers a higher interest rate in the future. 

The EPF currently offers one of the highest interest rates among fixed-income investments. It is a tax-efficient investment as compared to bank FDs. In a nutshell, EPF remains an excellent investment to help you attain long term financial goals.

For any clarifications/feedback on the topic, don’t hesitate to contact the writer at cleyon.dsouza@cleartax.in.

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