EPFO liquidates equity outlay, retains 8.5% payout for FY21

NEW DELHI: Amid falling interest rate, the Employees Provident Fund Organisation (EPFO) has managed to hold on to 8.5% rate for the current financial year, providing relief to its nearly five crore active subscribers. Many will be hit hard by the government’s move to tax returns if contributions top Rs 2.5 lakh annually.
The decision was taken at a meeting of the EPFO’s central board of trustees headed by labour minister Santosh Gangwar. It will need to be endorsed by the finance ministry, which is known to raise the red flag almost every year before holding itself back.

The retirement savings agency has relied on the stock market to offer higher returns. “For FY 2021 (2020-21), EPFO decided to liquidate investment 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. This has enabled EPFO to provide higher return to its subscribers and still allowing EPFO with healthy surplus to act as cushion for providing higher return in future also. There is no over-drawl on EPFO corpus due to this income distribution,” an official statement said, pointing to its equity investments over the years.
EPFO will be left with a surplus of around Rs 300 crore.
At the current level, someone in the 30% income tax slab will earn annual returns of over 11% given the tax-free status enjoyed by it currently.
In contrast, other investments, such as fixed deposits with banks don’t only offer such high rate but face tax if over Rs 1.5 lakh is parked even in maturity basket of over five years. Currently, SBI is offering 5.4% on fixed deposits with maturity of five to 10 years, and post-tax it will translate into an annual return of around 3.8% for someone in the 30% tax slab.
Similarly, public provident funds deposits currently fetch 7.1% but the investment is capped at Rs 1.5 lakh annually.
Apart from returns, provident fund also comes with the power of compounding, which means if you stay long enough, based on compound interest on the corpus, your returns actually grow significantly with your annual contribution adding to the benefit. Even the government did not fail to point it out.
“A high EPF interest rate, along with compounding, makes a significant difference to gains of subscribers. This is despite the fact that EPFO has consistently followed a conservative approach towards investment, putting highest emphasis on the safety and preservation of principal first approach. Risk appetite of EPFO is very low, since it involves investing poor man’s retirement savings also,” the labour ministry said in a statement.
The government on Thursday said that EPFO has extended its coverage to establishments in Jammu and Kashmir and Ladakh after the implementation of EPF & MP Act to the two Union Territories from the end of October 2019. During this period, the coverage has extended to 4,754 establishments compared to 3,458 at the end of October 2019, while the number of subscribers has shot up 63% to 2.1 lakh.