Finance Ministry defends lower EPF rate, cites lower earnings of EPFO

Finance Ministry on Wednesday defended its decision to pay 8.7% interest on EPF saying last year's surplus would have to be used to pay this rate even as the Labour Ministry assured RSS-backed trade union BMS that it would push for 8.8% rate. 

Opposing the lowering of interest rate, as many as 10 central trade unions have decided to hold a day-long protest on Friday against the Finance Ministry's decision. However, the BMS will not be part of that protest.

A Finance Ministry source said the decision was based on "pure arithmetic calculation" and is aimed at ensuring sustainability of the EPFO and providing "stable returns" to its members in falling interest rate scenario. 

Meanwhile, Labour Minister Bandaru Dattatreya today met the RSS-backed Bharatiya Mazdoor Sangh (BMS) and assured that his ministry will press for an 8.8% interest rate and present "all justifications" for it to the Finance Ministry. 

Earlier in February, the Central Board of Trustees (CBT) of the EPFO had decided to provide 8.8% interest to its over five crore subscribers for 2015-16, a tad higher than 8.75 provided in previous two fiscals. Later, the Finance Ministry ratified the interest rate at 8.7% which sparked strong reaction from the trade unions who termed the decision as an encroachment on the CBT's territory.

"The earning of the EPFO in 2015-16 is not even sufficient to pay 8.7%. The ratified interest rate of 8.7% would leave a surplus of around Rs 1,000 crore with EPFO for the year 2015-16. This is still lower than the surplus of Rs 1,604.05 crore for the year 2014-15," the source said. 

The source said that at the proposed rate of 8.8% this surplus would be reduced to just Rs 673.85 crore in the year 2015-16. "Thus the proposed rate of 8.8% seeks to draw on surplus of last year and this would adversely hit maintenance of relatively stable returns to investors for the next year in a falling interest rate scenario," the source added. 

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. 

"The Ministry of Finance ratifies the rates on the basis of proposal from the Labour Ministry, taking into account financial sustainability and ensuring stable returns to the investors," the source said. 

The Finance Ministry source further 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 existing 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?" the source 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% interest rate for over five crore subscribers of the Employees' Provident Fund Organisation (EPFO). This is probably the first time when the 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 development comes against the backdrop of the government withdrawing two proposals pertaining to EPF. Buckling under pressure, it rolled back the decisions to tax EPF as well as tighten withdrawal norms. 

The EPFO had provided 8.75% rate of interest in 2013-14 and 2014-15, which was higher than 8.5% in 2012-13 and 8.25% in 2011-12. Its estimates, worked out in September, projected that the body can easily pay 8.95% 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.