HIGHLIGHTS
NEW DELHI: The Central Board of Trustees of the Employees’ Provident Fund Organisation (EPFO) has recommended increasing the interest rate on Employees’ Provident Fund for 2018-19 to 8.65% from 8.55% in the preceding year. The move has to be approved by the finance ministry.
What’s with elections? The hike comes after two years of rate cuts (from 8.75% for 2014-15 to last year’s five-year-low of 8.55%) and is the first in four years. Surprisingly, last year when EPF rate was cut EPFO’s surplus was Rs 600 crore and this year when it wants to give more it will be left with a surplus of just Rs 151 crore.
The rate hike isn’t surprising, but a rate cut would surely have been against the trend. EPF interest rates never go down in election years, they are either retained at the same level or hiked. Before 2014 elections, the interest rate (for 2013-14) was hiked to 8.75% from previous year’s 8.5%. While EPF rates were retained at the same level just before elections in 2009, 2004, 1999, 1998, 1996 and 1991 they were hiked before those in 1989, 1984 and 1977. That’s true for all elections since the first one in 1952
Bigger than it seems? First, the steep fall in inflation means the real (effective) interest rate that you earn on your EPF has gone up too. The hike makes the deal sweeter. Second, hardly any other investment offers rates better than EPF. The average interest rate of small savings instruments like the Public Provident Fund and the National Savings Certificate in 2018 was 7.7%.
Market-linked investments also don’t come close to the EPF rate. That EPF withdrawal (after completing five years of continuous service) is tax free makes it even better. In fact, because of the tax-free interest, depending on your income and tax bracket, the 8.65% could mean an effective interest of up to 13.5%. Check out the calculations here.
And elections? EPFO has an active subscriber base of more than 6 crore, so happy subscribers could mean good news for the Modi government which (some reports say) is likely to struggle to win majority in the coming polls.
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