The Employees Provident Fund Organisation (EPFO) made headlines recently for proposing an 8.5% interest rate for Provident Fund contributions under the Employees’ Provident Funds Scheme for the fiscal year 2020-2021.
Overview of Employees’ Provident Funds (EPF) Scheme
Established under the Employees’ Provident Funds and Miscellaneous Act of 1952, the EPF is a vital scheme that sets up provident funds for employees in factories and other establishments. The employee and the employer each contribute 12% of the employee’s basic salary and dearness allowance to the EPF. According to the Economic Survey 2016-17, there were suggestions to give employees the choice to either save 12% of their salary into EPF or take it as part of their pay. Existing laws mandate that any individual whose monthly salary does not exceed Rs. 15,000 should be a member of the EPF.
Key Points on Interest Rate: Continuation of the Old Rates
Despite the economic downturn throughout 2020 due to the Covid-19 pandemic, the EPFO managed to maintain the high interest rate of 8.5%. This is the same as the previous year when the EPFO dropped the interest rate on provident fund deposits to 8.5% for 2019-2020 from 8.65% in 2018-19 and 8.55% in 2017-18.
The Secret Behind High Returns
The high returns were primarily due to income from interest from debt investment and income from equity investment made by the EPFO. To facilitate these higher returns, the EPFO decided to liquidate its investment in equity through exchange-traded funds which it started in 2015-2016. This move allowed the EPFO not only to provide higher returns to its subscribers but also to maintain a healthy surplus that would act as a cushion for providing higher returns in the future.
Understanding Key Terms: Debt and Equity Investment
Debt investment refers to an investor lending money to a firm or project sponsor with the hope of getting the investment returned with interest. On the other hand, equity investment involves investing money in a company by purchasing shares of that company in the stock market.
About Employees Provident Fund Organisation
The EPFO is a governmental organisation tasked with managing provident fund and pension accounts for workers employed in India’s organized sector. It enforces the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 which instituted provident funds for employees in factories and other establishments. Overseen by the Ministry of Labour & Employment of the Government of India, it is one of the world’s largest social security organisations based on clientele and volume of financial transactions performed.
