EPFO: Interest Rate for 2020-21

• 05 Mar 2021

Why in News

• Recently, the Employees Provident Fund Organisation (EPFO) recommended that subscribers be given 8.5% interest rate for Provident Fund contributions (under Employees’ Provident Funds Scheme) for 2020-2021.

Employees’ Provident Funds (EPF) Scheme

• EPF is the main scheme under the Employees’ Provident Funds and Miscellaneous Act, 1952.
• This scheme offers the institution of provident funds for factory employees and other establishments.
• The employee and employer each contribute 12% of the employee’s basic salary and dearness allowance towards EPF.
  
  • The Economic Survey 2016-17 had suggested that employees be allowed to choose whether or not to save 12% of their salary into EPF or keep it as take home pay.
• As per current laws, a person mandatorily becomes a member of EPF if his monthly salary does not exceed Rs. 15,000.

Key Points

• Interest Rate:
  
  • The interest rate was kept the same as the previous year.
    
    • In March 2020, EPFO had reduced interest rate on provident fund deposits to 8.5% for the year 2019-2020.
    • The interest rate was 8.65% in 2018-19 and 8.55% for 2017-18.
• High Returns:
  
  • Amid falling interest rates owing to the economic slowdown throughout 2020 due to the Covid-19 pandemic, the EPFO has managed to hold on to the high interest rate of 8.5% in the current year.
• Reason for High Returns:
  
  • The interest rate recommended was a result of the income from interest from debt investment and income from equity investment.
    
    • EPFO had decided to liquidate investment in equity through exchange traded funds, which it had started in 2015-2016.
    • 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.

Key Terms

• Debt Investment:
  
  • It refers to an investor lending money to a firm or project sponsor with the expectation that the borrower will pay back the investment with interest.
• Equity Investment:
  
  • It is the money that is invested in a company by purchasing shares of that company in the stock market.

Employees Provident Fund Organisation

• It is a government organization that manages provident fund and pension accounts for the workforce engaged in the organized sector in India.
• It implements the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952.
  
  • The Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 provides for the institution of provident funds for employees in factories and other establishments.
• It is administered by the Ministry of Labour & Employment, Government of India.
• It is one of the World's largest Social Security Organisations in terms of clientele and the volume of financial transactions undertaken.

Source:TH