India Decreases Interest Rate for Employees’ Provident Fund

Before the Union Budget 2012-13, the Finance Minister of India made the decision to decrease the rate of interest on deposits in the Employees’ Provident Fund to 8.25 percent for 2011-12.

This move represents the largest rate cut in over a decade and would be 1.25 percent lower than the 9.5 percent interest rate availed by the Employees’ Provident Fund Organization’s (EPFO’s) 4.7 crore subscribers in 2010-11.

EPFO has stated in a circular that, “It is to inform that the Ministry of Labor and Employment has conveyed the approval of the Central government to credit interest at 8.25 percent for the year 2011-12 to the account of each member of the scheme. You are accordingly requested to issue necessary instructions to all concerned for crediting the interest to the members’ accounts.”

The EPFO had suggested last December a lower interest rate to its apex decision making body, the Central Board of Trustees, but it had failed to make a decision. As an alternative, it had referred the topic to the finance ministry to make a call on the rate of interest, suggesting three different rates ranging between 9.5 percent and 8.25 percent.

In opposition for the 8.25 percent interest rate, the EPFO said this would result in a shortage of a mere Rs. 24 lakh against its earnings. It had further pointed out that an 8.5 percent rate of return for subscribers would translate into a deficit of Rs. 526.44 crore. Trade union leaders, on the other hand, have pitched for 9.5 percent on grounds that the EPF could not give a return less than the 8.6 percent given the Public Provident Fund Scheme.

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