Government cuts EPF interest rate to 8.70% during 2015-16, sparks protest

Government cuts EPF interest rate to 8.70% during 2015-16, sparks protest

The government has decided to lower the interest for five crore Employees' Provident Fund subscribers to 8.70% in 2015-16, from 8.75% a year ago. The rate is lower than the 8.80% recommended by the EPF Organisation's board and has triggered protests by unions, including RSS backed Bharatiya Mazdoor Sangh, which has announced nationwide protests on Wednesday.

EPFO's finance committee had recommended an interest rate of 8.95% but the board, headed by the labour minister, settled for 8.80% before the finance ministry brought it down to 8.70%. The finance ministry defended the move, saying the lower payout was needed as EPFO would pay interest on inactive accounts from April. The Centre on Monday decided to lower the interest for Employees' Provident Fund (EPF) subscribers to 8.70% during 2015-16, sparking protests from unions.

When the finance ministry said that the lower payout was essential as EPFO will pay interest on inactive accounts from April, the unions countered this argument saying that the payment on the inert accounts was to be made from the current financial year while the interest rate for last year was determined on the basis of the income and surplus for 2015-16.

EPFO had a distributable surplus of Rs 34,844 crore during the year and interest rate of 8.7% would leave the retirement savings agency with a surplus of Rs 870 crore. At 8.8%, the surplus would have been around Rs 674 crore and even after paying 8.95%, the entity would have been left with Rs 91 crore, said Prabhakar Banasure, the BMS representative on the EPFO.

The lower rate is in line with the finance ministry's attempts to ensure that savings and deposits fetch lower returns so that bank lending rates could be lowered. It has already announced a steep reduction in interest rate on small savings schemes such as public provident fund and Kisan Vikas Patras for the AprilJune quarter.

The latest decision, coming after two aborted attempts to "reform" EPFO, has evoked strong response from trade unions. Last month, the government was forced to drop its plan to tax withdrawals at the time of retirement if a part of the corpus was not used to buy pension plans. Last week, it had to cancel an order that mandated that the entire corpus could not be withdrawn until a subscriber turned 58 years. An official said this was probably the first time that the finance ministry had opted to lower the rates, ignoring the recommendations of the EPFO board of trustees, headed by the labour minister.

In fact, the finance ministry ignored an assurance given by Dattatreya that the interest rate would not be lower than the interim rate of 8.8% recommended by the EPFO board.

Source:BankingUpdates