The Provident Fund (PF) remains the only saving grace and raincheck for the bulk of the organised salaried class estimated to be 4.71 crore. The EPFO wants to reward the provident fund subscribers with a higher interest of 8.65 percent for the financial year 2018-19 as against 8.55 percent it paid for the previous year, i.e. 2017-18. It seems the finance ministry has objections mainly because banks have difficulty in catching up with EPFO in the matter of the offer of a higher rate of interest.
The EPFO must be commended for its proposed hike on the back of its financial performance that would leave it with a surplus of Rs 150 crore for the fiscal year 2018-19 even after the interest hike to 8.65 percent. In a way, it is declaring dividend camouflaged as interest given the fact that investing employees’ retirement funds are its only mandate. The dividend of a company as well as of a mutual fund fluctuates with their financial performance. So must EPFO’s. Indeed, EPFO interest rates have been fluctuating from year-to-year.
The EPFO had provided a five-year low rate of interest of 8.55 percent to its subscribers for 2017-18. The body had kept the interest rate at 8.65 percent in 2016-17 and 8.8 percent in 2015-16. It provided 8.75 percent interest for 2013-14 as well as 2014-15. The rate of interest was 8.5 percent in 2012-13.
The Finance Ministry is wrong when it benchmarks bank fixed deposit interest rates with EPFO’s. It should not compare apple with oranges. True, banks are finding it difficult to lower the lending rates as they are unable to lower the deposit rates significantly because small savings schemes, constantly snapping at their heels, offer higher rates of interest. But EPFO isn’t a bank or a small saving scheme but more in the nature of a mutual fund with its subscribers being the employees. Of course, employees’ monthly contribution from their salary as buttressed by the employers’ contribution is not a voluntary investment but a statutory impost. However, that doesn’t change the character of the reward to the subscribers—dividend, although called interest.
Funds collected through EPFO are invested in government securities and in equity market (but not directly through shares but through exchange traded fund) in a ratio of 85:15. Earlier this year in the month of February, EPFO invested nearly Rs 1,500 crore in the Bharat Exchange Traded Fund, which in turn puts money in CPSEs’ and some private entities’ shares. The point is, EPFO is cast more in the role of a fund manager than a lender which a bank is.
It is true that in the past the EPFO had been under the thrall of the powers that be who would inflict on it a higher burden by thrusting on it the interest that wasn’t justified by its financials but this time around it is entirely performance-based.
Employees must be encouraged to contribute more and more to their provident fund that is meant to be their retirement corpus although it must be conceded that the EPFO allows too many liberties and opportunities to withdraw midstream at the drop of the hat. Be that as it may, but financially savvy employees volunteer a greater contribution than 12 percent of the salary that is the statutory minimum. Employers, however, are not obliged to make a matching contribution beyond 12 percent as well as on salary beyond Rs 15,000. The proposal to hike the salary cut-off for the employer’s contribution to Rs 21,000 has been in the air for quite some time now.
EPFO interest is tax-free, both at the time of accrual and withdrawal by employees. This heightens the return for the subscribers. On the other hand, interest from bank fixed deposits is taxable except for senior citizens who enjoy tax exemption up to Rs 50,000 together with the savings bank interest earned by them.
(The writer is a senior columnist and tweets @smurlidharan)
Updated Date: Jun 28, 2019 15:12:49 IST