Saturday, January 23, 2016

Government Set To Increase Provident Fund Interest Rates

DELHI: The Employees Provident Fund Organisation’s (EPFO) finance panel has recommended raising the interest rate on statutory savings of over 5 crore subscribers from 8.75% to 8.95% during the current fiscal.

The proposal has to be endorsed by the central board of trustees before the finance ministry notifies it. If it goes through, it will be the highest return since the 9.5% paid in 2010-11 and the highest ever real interest rate (after netting out inflation) in recent years. An 8.95% rate will translate into returns of nearly 12% for those in the highest slab as the withdrawals and interest earnings do not attract tax at the time of withdrawal.

The proposal comes at a time when the government and the Reserve Bank of India are looking to reduce deposit rates so that banks can cut lending rates and spur investment. A higher interest rate on EPF deposits may result in some diversion of funds from bank deposits or small savings schemes as voluntary contributions.

As reported by TOI on January 14, the finance ministry is expected to lower interest rates on several small savings schemes such as public provident fund or National Savings Certificate by up to 50 basis points, with a formal announcement expected shortly. 

An increase in rates in EPFO, which is the basic investment avenue for many employees in the country, may face some resistance from the finance ministry though it will be tough for it to block the proposal given the huge dependence of the middle class on the savings. 

In the past, the finance ministry has sometimes objected to recommendations from the central board of trustees but approved it. On its part, the EPFO panel is of the view that the retirement savings body has the resources to fund the proposed 8.95% rate. The agency is hoping to convene a meeting of the CBT headed by labour minister Bandaru Dattatreya at the earliest for the interest rate proposal to be ratified by the apex decision making agency.

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