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.
- The interest rate was kept the same as the previous year.
- 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.
- The interest rate recommended was a result of the income from interest from debt investment and income from equity investment.
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.