In about 10 days, the Employees’ Provident Fund Organisation (EPFO) will announce the rate of interest for the year ended March 2022. It’s a much-anticipated annual event for many of EPFO’s members—some 60 million employees across India who, along with their employers, salt away a part of their salary each month with the EPFO.
The EPFO is a behemoth. Since its establishment in 1952, its corpus has swelled to about Rs 16,00,000 crore ($211 billion). This makes it the country’s largest retirement corpus provider, and among its largest money managers, next only to LIC and the mutual fund industry.
If the past is a precedent, EPFO’s members should have much to cheer about this time too.
The interest rates on the EPF for the years ended March 2021 and March 2020 were 8.5%. This, when rates had fallen sharply across the board. Despite some gripe about the 8.5% being the lowest EPF rate in years, it was much higher than comparable instruments such as bank fixed deposits (5-6%) and small savings schemes such as the Public Provident Fund (7-8%).
The higher-than-market rate is likely to continue in the current year. “That’s the expectation,” K.E. Raghunathan, member of the Central Board of Trustees (CBT) of the EPFO, tells The Ken. Raghunathan is an employer representative in the 43-member CBT, the apex decision making body of the EPFO. Chaired by the Union Labour Minister, the CBT decides the EPF interest rate each year, which is then ratified by the Ministry of Finance.
This year, the EPFO could declare a rate of 8-8.5%, say market observers. Factor in the tax exemption on interest accrued from the EPF, and the effective pre-tax return could go as high as ~12%. An equity-like return on a safe, debt-like investment. What’s not to like?
Turns out, there are a fair few catches. For one, many experts question the sustainability of the high rates being declared by the EPFO.
“The rates are populist and politically sensitive. There is no clarity on where the money is coming from. In that sense, the EPFO is a black box that churns out high rates,” says Shashi Singh, founder of financial planning firm FinMyn. “Paying higher than market rates is not sustainable in the long run,” he adds.
The populism was on clear display in 2020, when the EPFO did something unusual.