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As a setback to all employees investing in Employee Provident Fund (EPF), the interest paid to them decreases to 8.55% - lowest in 5 years.

EPF interest rates fall

India’s retirement fund manager, the Employees’ Provident Fund Organisation (EPFO) has cut its rate of interest to 8.55% - the lowest seen in five years. The move is expected to affect more than 50 million subscribers.

Over the past few years, the interest rate has been on a downswing – 8.8% in 2015-2016 and 8.65% in the fiscal year that followed. At present, with the 0.1% decrease, over 6 million people’s nest egg is going to shrink further.

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The decision was made at the 220th board meeting of the Central Board of Trustees (CBT) of the EPFO. After the meeting, the CBT said that in the current uncertain condition of the market, this rate was the best it could offer. After this move, there will be an excess of Rs. 586 crores left with the EPFO as compared to Rs. 695 crores in 2016-2017. This indicates that the reason for lower payouts is strained finances.

Earlier this year, equity shares worth Rs. 3700 crores were sold by the EPFO, securing the organisation a revenue of Rs. 1100 crores. By this outcome, it was felt that the current interest rate of 8.65% could have been retained. However, the earnings were not sufficient enough to offer higher interest rates or even match that of the preceding year.

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The ministry will vet the decision taken by the board after assessing if the EPFO would be able provide the rate that has been sanctioned by the trustees from its own income. Once the stamp of approval is given, accounts of EPFO members will be credited with the interest income.

The returns of Provident Fund subscribers were to be enhanced when the EPFO went to the stock market. Yet, after two-and-a-half years, the rate has only been diminishing.

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The EPFO needs to maintain an excess amount of Rs. 600 crores because, across the globe, pension funds are required to preserve a healthy stabilisation fund.

The EPFO manages a corpus of more than Rs. 10 lakh crores, and since August 2015, this has been invested in ETFs. Till date, the EPFO has invested about Rs. 44,000 crores in ETFs. As of January-end, 16% returns have been earned through equity investments.

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The Indian government is striving to offer the highest amount of benefits to employees. And despite the recent reduction, the EPF rate provides more than the Public Provident Fund (PPF) and the Government Provident Fund (GPF), both of which made an interest of 7.6% this quarter.

The EPF Act has been amended to increase social security benefits and add further companies under the organisation. Currently, all firms and organised sector establishments having 20 employees or more come under the EPFO. The ceiling has now been reduced to 10.

The upshot for customers is that although the rate of interest has been lowered, PF deposits, PPF, and other schemes still offer attractive investment options.