EPF rate hiked to 9.5%

NEW DELHI: The government today hiked the interest rate paid to Employees Provident Fund (EPF) subscribers from an interim 8.5% to 9.5% for â€˜04-05. The 100 basis point increase comes as a bonanza for the 2.7 crore EPF depositors, though it would signal a hardening of interest rates in the economy and adversely impact the bond market. Finance minister P Chidambaram today said that Prime Minister Manmohan Singh had considered the matter carefully before taking a decision. The late evening announcement is, however, being viewed as a trade-off with the Left for letting the government hike the FDI limit in telecom from 49% to 74%. The FDI hike was cleared by the Cabinet earlier in the day. The hike in EPF rate will mean a shortfall of Rs 269 crore to the EPFO. The finance ministryâ€™s contention has been that the EPFO would just about manage to break even if it were to declare an interest rate of 8.25%, considering that there has been a fall in the yields on its investments. Labour ministry sources, however, maintained that the Rs 269 crore loss would be made good through a Rs 300 crore arrears recovery by the EPFO from several establishments. A treasury manager of a leading public sector bank said the EPF rate rise would adversely affect the bond market tomorrow, though markets did have some apprehensions about a possible hike. â€œIt is a clear signal that interest rates must realign upwardsâ€�, he said. Along with the 100 basis point hike in the interest rate for â€˜04-05, the government has also ratified interest rates on EPF deposits for â€˜02-03 and â€˜03-04. For both these years, the interest rate was 9.5% â€” though for â€˜03-04, this included a golden jubilee bonus of 0.5%. Officials said EPFO had net yields of about Rs 708 crore till â€˜02-03. Though the fund had suffered a loss of Rs 271 crore in â€˜03-04, it is still left with a surplus of Rs 437 crore to offset the higher rates ratified by the finance ministry. Only last week the finance ministry allowed non government provident fund managers to invest up to 5% of their incremental deposits in equity. The EPFO has also made out a case for allowing investment in equities to generate higher returns. For â€˜04-05, the labour ministry had announced an interim 8.5% interest rate on EPF deposits. The government was, however, under pressure from the Left to hike the interest rate and the demand was made even during the pre-budget interaction with finance minister P Chidambaram. EPF Fact File The employees provident fund scheme is a mandatory scheme for all establishments, which employ more than 20 people. Both the employee and the employer contribute to the fund at a rate of 12% of the basic wages. The scheme, which is basically aimed at providing social security, covers close to three crore members and over 3.5 lakh establishments. The interest on the EPF is credited to the membersâ€™ account on monthly balances with effect from the last day in the each financial year. The interest rate is determined by the central board of trustees of the EPFO in consultation with the government. The CBT declares the interest rate for EPF subscribers, which is subsequently approved by the finance ministry. The EPFO then notifies the interest to be credited to members. Over the last couple of years, the labour and finance ministries have been slugging it out on the interest rate with the finance ministry pushing for a lower rate consistent with the lower interest rate on small savings scheme.

EPF rate hiked to 9.5%

The Centre has hiked the interest rate paid to EPF subscribers from an interim 8.5% to 9.5% in '05.

More from our Partners

Popular Categories

Hot on Web

In Case you missed it

Top Searched Companies

Latest News

Download ET APP

Follow us on

become a member