The Employees' Provident Fund Organization has proposed to cut interest rate on provident fund deposits to its lowest level in over four decades.
An interest rate of 8.1% has been recommended for EPFO's subscribers for the year 2021-22, compared with 8.5% in the previous 2020-21, according to a statement by the Ministry of Labour and Employment.
"For FY22, EPFO decided to liquidate some of its investment in equities and the interest rate recommended is a result of combined income from interest received from debt investment as well as income realised from equity investment," it said.
The rate will now be approved by the Finance Ministry.
This is the lowest interest rate offered by EPFO since 1977-78. However, it remains higher than returns offered by instruments such as government securities and bank deposits. For instance, State Bank of India offers an interest rate of 5.1-5.4% on term deposits of 1-10 years.
Rates in the economy have fallen broadly as the central bank cut its benchmark repo rate to a record low of 4% amid the Covid crisis. With the economic recovery incomplete, rates are unlikely to rise in a hurry.
K E Raghunathan, member of Central Board of Trustees of the EPFO, told BloombergQuint that they reduced rates keeping in mind that revenue might fall this year because of the ongoing Russia-Ukraine crisis conditions. "This year we will make a surplus of Rs 450 crore at 8.1%. Had we maintained 8.5%, we would have been at a deficit of Rs 3,500 crore."
We understand that this is going to be the most unpredictable year because of the war and market conditions, among other things. While we expect the corpus might rise significantly, we understsand the revenue might be tapered this year. So we want to be prepared, we don't want to overcommit.K E Raghunathan, Member, Central Board of Trustees, EPFO
Raghunathan is part of EPFO's sub-committee that met in Guwahati. The 2-day annual meeting concluded on Saturday.
The meeting was also attended by Labour Minister Bhupendra Yadav, Minister of State for Labour and Employment Rameshwar Teli, Labour and Employment Secretary Sunil Barthwal, and Central PF Comissioner Neelam Shammi Rao.
The board also approved the revised estimates for the year FY21 and budget estimates for FY23 for schemes administered by EPFO.
"The board was informed that redemption of equity investment was carried out during the month of February 2022 which resulted in the realisation of capital gains of Rs. 5529.7 crore which will be included in the income for FY22," the statement said. "The annualised rate of return on this investment was 13.91%, the highest in the last three years."
The board also ratified the decision to redeem non-convertible debentures of Air India in EPFO's portfolio. This redemption had helped EPFO realise Rs 8,944.32 crore against the face value of Rs 7,772.50 crore, the statement said.
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