Interest on Provident Fund Hiked
Over 50 million employees of the organised sector are in for a surprise Dussehra bonanza from the government. The interest rate on the Employees’ Provident Fund ( EPF Balance ) could be hiked to 9.5% this year; just enough beat the high inflation.
The EPF rate has been 8.5% since 2005-06. The new wholesale price index unveiled on Tuesday put the inflation rate for August at 8.51%.
Although the provident fund’s estimated earnings for 2010-11 would only support a payout of 8.5%, the EPF India has managed to discover a hidden surplus of close to Rs2,000 crore in its accounts.
Union labour minister Mallikarjun Kharge would preside over a meeting of the EPFO board of trustees on Wednesday to take a call on rates.
The surplus cash has been discovered after a comprehensive analysis of the EPF Scheme’s accounts since its inception in 1952. A review of the accounts was commissioned at the board’s last meeting in April.
While a higher PF rate would be a pleasant surprise for the middle class, it could dent India Inc’s profitability. Thousands of company-run PF trusts that are required to match the PF rate declared by the government would have to fork out any shortfall in earnings from their parent’s books.
“Low interest rates in recent years have meant that returns on PF portfolios seldom crossed 8.5%,” said Amit Gopal, vice-president at India Life Capital, a firm that advises PF trusts of several blue-chip firms. “This could pose a problem for India Inc,” he said.
EPFO follows a single-entry based accounting system, where interest is manually credited to workers’ accounts. The board had sought to ascertain the status of the Interest Suspense Account, where EPF’s annual income is parked till it is distributed to members.
Although the decision to provide 9.5 per cent interest rate would result in a deficit of about Rs. 1,600 crore, the same would be made good by a surplus of Rs. 1,731 crore in the interest suspense account of the EPFO.
The recommendation of the CBT, headed by Labour Minister Mallikarjun Kharge, will be forwarded to the Finance Ministry.
The Finance Ministry, which notifies the provident fund interest rate, usually accepts the recommendation of the CBT.
The account had a balance of Rs27,000 crore by the end of 2009-10. This means that the EPFO isn’t able to credit the annual PF rate to all its 5 crore-odd members’ accounts before the close of a financial year in question, thanks to its archaic procedures.
The PF department has admitted that the huge balance in the account would ‘ideally’ vanish if all past years’ annual accounts were updated. But the board wanted to know if the suspense account had a net deficit or surplus — a question raised persistently in recent years.
To answer that question, the department reopened the EPF’s balance sheet since 1952 and carefully examined earnings vis-à-vis accrued liabilities. The exercise has thrown up a surplus of around Rs2,000 crore. A 1% hike from the existing PF rate of 8.5% would require around Rs1,700 crore surplus beyond the projected income for 2010-11.
While the surplus should suffice to pay a 9.5% PF rate for the first time since 2004-05, it is possible that the board may decide to save some of it as cushion money for the future. The EPF scheme has a balance of about Rs170,000 crore, which is expected to rise to over Rs182,000 crore by March 2011.
The EPFO had been maintaining an 8.5 per cent rate on provident fund since 2005-06.
Prior to 2005, the retirement fund manager had maintained an interest rate of 9.5 per cent for three consecutive financial years between 2002 and 2005.
In April, the trustees of the Employees' Provident Fund Organisation's had deferred a decision on rate of return for its subscribers for 2010-11. The employees' representatives had demanded at the last meeting that the rate of return on provident fund deposits be raised to 9.5 per cent. Check your PF Status Online!