First, the good news: Your provident fund balance could earn the promised 8.5 per cent for the financial year 2019-20.
The Employees’ Provident Fund Organisation’s central board of trustees on Wednesday announced that the retirement body will keep its promise made to six crore subscribers in March 2020. The rate has to be ratified by the finance ministry.
But, the board’s recommendation on interest rates to the central government has come with its share of confusion: some reports suggest that the interest pay-out will happen in two tranches. That is, you will receive 8.15 per cent interest immediately. This will be met from the income earned by the fund. The balance 0.35 per cent will be credited to your account before December 31, once the retirement body liquidates its equity investments. On the other hand, there are reports suggesting that the interest will be credited in one go.
However, Virjesh Upadhyay, member of the board, clarified that employees would definitely earn 8.5 per cent interest for 2019-20. “This will be done in two instalments, as decided in the board meeting,” he said.
Why has the EPFO announcement triggered speculations?
Your funds in your EPFO account earn an interest. The government announced this rate of interest at which your overall EPFO (yours as well as your employer’s contribution) every year. Typically, the government announces this rate between January and March every year. The EPFO interest rate has usually been among the highest offered by traditional fixed-income instruments. This interest is then credited to your account by July. This year, although the interest rate of 8.5 percent was announced earlier in the year, our EPFO accounts have been credited with the interest pay-outs.
The EPFO trustees met on Wednesday and reconfirmed their decision of paying the long-pending interest. But official communication further added to the confusion. It said: “It (the interest) would comprise of 8.15 per cent from debt income and balance 0.35 per cent (capital gain) from the sale of ETFs subject to their redemption by December 31, 2020.” This was also proposed in a meeting in March, before the COVID-19 outbreak in India and market crash in March.
“Now, the official release states that the 0.35 per cent payout will be made subject to redemption of equity investments. So, confusion has arisen over whether the 8.15 per cent will be credited now, with the balance being credited in December or will the credit be effected in December or is it possible that the ETF units not be redeemed this year, if stock markets underperform and no capital gains are made,” says an industry source, speaking on the condition of anonymity.
A formal notification is awaited, to put an end to the speculations.
If the interest is credited in two tranches, how will the payouts be made?
To be sure, there is no clear official communication from the labour ministry on crediting interest in instalments.
But assuming that a formal notification detailing the mode of payout mentions instalments, income from debt instruments will be used to make the 8.15 per cent credit by September-end. The balance 0.35 per cent will come from liquidation of its equity investments.
The move comes in the backdrop of reports that the retirement body’s investments in exchange traded funds (ETFs) of close to Rs 1 trillion have yielded negative returns.
For example, the CPSE ETF’s one-year returns have nosedived to -25.81 per cent. Likewise, the one-year returns of the other mega ETF – Bharat Bond – have plunged to -24.9 per cent as on September 9, according to data from Value Research. The markets took a beating due to the COVID-19-induced panic after the 8.5 per cent rate was announced in March. To be sure, EPFO also invests in Nifty and Sensex-based ETFs in addition to disinvestment ETFs.
Out of contributions received from employees and the matching amount from employers, EPFO invests 85 per cent in debt instruments and 15 per cent in exchange-traded funds (ETFs). It was allowed to invest 5 per cent of incremental flows (that is, fresh contributions) in equities in 2015, with the exposure being scaled up to 15 per cent in 2018.
Will the delay in crediting interest proceeds hurt my EPF balance?
Usually, the interest for a financial year is credited in the subsequent financial year. So, the interest announced is applicable for 2019-20. “The 8.15 per cent rate will certainly be applicable retrospectively, from the beginning of April 1, 2019. Clarity is needed on the 0.35 per cent part,” says Divya Baweja, Partner, Deloitte India.
The rate has declined from 8.65 per cent for 2018-19 to 8.5 per cent now. Should I withdraw funds and invest elsewhere?
First, you cannot make even part withdrawals from your EPF corpus at will. It can only be done under certain circumstances. For example, to buy a house, fund your higher education or that of your spouse or children, financing critical illnesses and so on.
Moreover, while the interest rate is lower than last year’s, it is far higher than what bank and India Post fixed deposits fetch currently. It is also completely tax-exempt (at investment, accumulation and maturity stages), unless you are switching to the new tax regime announced in Budget 2020.
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