EPFO To Decide On FY21 Interest Rate Amid Drop In Formal Sector Contribution

Deciding On The Rate Of Interest

The EPFO’s central board of trustees led by Labour and Employment Minister Santosh Kumar Gangwar is expected to approve the interest rate for FY21 when it meets. A number of factors will go into deciding the final payout.

At the start of the Covid-19 pandemic in India, the EPFO had launched an advance withdrawal facility allowing formal sector workers to withdraw EPF advance to the tune of three months of their wages or up to 75% of their balance, whichever is less.

The EPFO expects that its subscribers will withdraw advance money to the tune of Rs 50,749 crore in FY21—a jump of over 50 % from the previous fiscal year. There will be an estimated 16% rise in the final amount withdrawn by EPF subscribers in FY21 compared to last year. The EPFO allows subscribers to withdraw a portion of their savings in the form of an advance and it allows for a final settlement at the time of switching or leaving a job.

This, together with the return on investments made by the EPFO in various debt and equity schemes will determine the interest rate paid out. In FY20, the interest rate on EPF savings was at a seven-year low of 8.5% but much higher than other small saving schemes. In FY19, the interest rate stood at 8.65%.

Equity Investments

For the first time since it started investing in the stock markets in August 2015, the EPFO will not share a ‘status note on investment in exchange-traded funds (ETFs)’ with its board members in the upcoming meeting. However, the EPFO has apprised the board about the robust returns on its equity investments of 2016, which were redeemed in the October-November 2020 period.

The EPFO realised capital gains of Rs 3,277 crore through the redemption exercise, leading to a gain of 53% over its purchase price in 2016, according to the agenda papers reviewed by BloombergQuint.

The capital gains from the EPFO’s equity investments were included in its calculation for crediting the interest rate declared for FY20 to its subscribers. The EPFO had expected to redeem its ETF investments made in 2016 for FY20 and gain around Rs 2,800 crore from it, according to the agenda documents of the previous board meeting held in September. This transaction was supposed to take place in March 2020. However, in view of the market sell-off in March, triggered by the Covid-19 pandemic, the EPFO decided not to sell its ETF investments then, even though it had announced the interest rate of 8.5% on March 5, factoring in the return from its equity investment.

For FY21, the EPFO had not announced any plans to redeem its equity investments.

The EPFO invests up to 15% of its incremental corpus in ETFs. In FY20, the EPFO’s ETF investments led to a return of -8.3%, down from 14.7% in FY19, mainly due to a sell-off in the stock markets in March after the pandemic.

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