The Employees’ Provident Fund Organisation (EPFO) has announced a three-year high interest rate of 8.25% on employees’ provident fund (EPF) deposits for the fiscal year 2023-24. This is a welcome news for over 60 million EPF subscribers who will benefit from higher returns on their savings.
What is EPF and why is it important?
EPF is a mandatory savings scheme for salaried employees in India. It is regulated by the EPFO, a statutory body under the Ministry of Labour and Employment. Under the scheme, an employee contributes 12% of his or her basic salary and dearness allowance to the EPF account every month. The employer also makes a matching contribution, out of which 3.67% goes to the EPF account and 8.33% goes to the Employees’ Pension Scheme (EPS).
EPF is a long-term investment option that helps employees build a corpus for their retirement. It also provides social security benefits such as insurance cover, pension and gratuity. EPF subscribers can also withdraw money from their accounts for various purposes such as housing, education, medical emergencies and marriage.
How is the interest rate decided?
The interest rate on EPF deposits is decided by the Central Board of Trustees (CBT) of the EPFO, which comprises representatives of the government, employers and employees. The CBT considers various factors such as the income and expenditure of the EPFO, the market trends, the inflation rate and the government policies before recommending the interest rate.
The recommended interest rate is then sent to the Finance Ministry for approval. Once approved, the interest rate is notified by the EPFO and credited to the subscribers’ accounts at the end of the financial year.
What are the benefits of higher interest rate?
The higher interest rate of 8.25% for 2023-24 means that EPF subscribers will earn more returns on their deposits than in the previous years. For instance, if an employee has a monthly basic salary of Rs 30,000 and contributes Rs 3,600 to the EPF account every month, he or she will accumulate Rs 5,48,240 in five years at an interest rate of 8.15%. However, at an interest rate of 8.25%, he or she will accumulate Rs 5,53,760 in five years, which is Rs 5,520 more.
The higher interest rate also means that EPF will continue to offer better returns than other fixed-income instruments such as bank fixed deposits, public provident fund and national savings certificates, which are currently offering lower interest rates due to the prevailing low-interest rate regime in the economy.
What are the challenges and opportunities for EPFO?
The EPFO faces several challenges in maintaining a high interest rate on EPF deposits in the long run. One of them is the increasing number of withdrawals by subscribers due to various reasons such as job losses, reduced incomes and financial distress caused by the Covid-19 pandemic. This reduces the investible surplus of the EPFO and affects its income generation.
Another challenge is the volatility in the equity market, where the EPFO has invested around 15% of its corpus since 2015. The equity investments have helped the EPFO earn higher returns in some years, but they also expose it to market risks and fluctuations.
The EPFO also has to balance its obligations towards its subscribers and its sustainability as a fund manager. It has to ensure that it pays a fair and attractive interest rate to its subscribers without compromising on its financial health and viability.
The EPFO also has some opportunities to improve its performance and service delivery. One of them is to increase its digital presence and outreach by leveraging technology and innovation. The EPFO has already taken some steps in this direction by launching online services such as e-nomination, e-passbook, e-KYC and e-inspection. It can further enhance its online platforms and processes to make them more user-friendly, transparent and efficient.
Another opportunity is to diversify its investment portfolio and explore new avenues for income generation. The EPFO can look into investing in newer asset classes such as debt exchange-traded funds (ETFs), infrastructure investment trusts (InvITs) and real estate investment trusts (REITs), which can offer stable and long-term returns with lower risks.
The EPFO can also collaborate with other stakeholders such as the government, employers, employees and financial institutions to create awareness and promote financial literacy among its subscribers. This can help them understand the benefits of saving for retirement and make informed decisions about their EPF accounts.
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