EPFO slashes Interest Rates on PF deposits to 8.65% for FY17

Last Updated : Dec. 20, 2016, 6:07 p.m.

The Employees Provident Fund Organization(EPFO)'s decision to slash the interest rate from 8.8% to 8.65% for 2016-17 doesn't seem to shock the investors as still, it continues to enjoy higher interest rates as compared to other financial instruments like Fixed deposits, national savings scheme, public provident fund etc.

The decision to reduce the interest rate by 0.15 percent is undertaken by  EPFO's apex decision making body, the Central Board of Trustees (CBT), headed by the Labour Minister.

When EPFO slashes interest rates on PF, the implications are going to be felt slowly in the next quarter.

Although, the yield on the government's 10-year benchmark has dropped to 6.51% .

The decision is equated with the falling interest rate regime  which witness RBI to cut key lending rates and banks reducing their deposit rates, something that is in line after the demonetization effect from Rs. 5,00 and Rs. 1,000 notes last month.

Earlier, in response to the protests made by trade unions, the government has to roll back their decision and fix 8.8 per cent rate of interest on EPF deposits for 2015-16. Retirement fund body had perpetuated interest rate at 8.75 percent for 2013-14 and 2014-15 while in 2012-13, the interest rate was 8.5 per cent.

In September, the government has curtailed the interest rates marginally on small savings schemes by 0.1 percent for the October-December quarter of 2016-17, as a result, started giving lower returns on PPF, Kisan Vikas Patra, Sukanya Samriddhi Account, among others.
Further, EPFO has also decided to reduce administrative charges to 0.65 percent from 0.85 percent, which is charged on the total wage on which contributions are paid.

In response to EPF decision, approximately 17 crore subscribers' accounts need to be updated with this interest rate upon acceptance by the government as stated by labor ministry officials after the 215th meet of the Central Board of Trustees (CBT), the EPFO's decision-making body. The notification of rates by the labor ministry in the times to come is awaited which will take into consideration the projected earnings and expenditure of the EPFO for the current financial year.

Let's see an illustration on how the earnings of an organized worker will change :

• Suppose the monthly balance of Mr. A is  ₹20,000
• Employee basic salary is  ₹2,000 (Basic +DA) per month. So, the employee contribution of 12% of  ₹  2,000=  ₹  240. Employer contribution of 8.33% of  ₹2,000 = ₹  166.6
• Assume EPF interest rate to be 8.8% per annum. The monthly interest rate would be 8.8%/12.
• April Interest Rate = Opening Balance+Employee Contribution+Employer Contribution*Interest Rate per month
• April EPF Interest =(20,000+240+166.6)*8.8%/12= ₹149.64
• Now at 8.65% EPF interest rate = (20,000+240+166.6)*8.65%/12 = ₹147.09