EPFO may lower interest rate to 8.25%

New Delhi: The advisory panel of retirement fund body EPFO has recommended a lower rate of interest of 8.25 per cent for the current fiscal compared to 9.5 per cent last year, a move that will affect over 4.7 crore subscribers.

The unions' representative on EPFO's advisory body, Finance and Investment Committee (FIC), has demanded maintaining the rate of interest at 9.5 per cent for 2011-12.

"FIC opined that payment of 8.25 per cent rate of return to its 4.7 crore subscribers during this fiscal is feasible," a source privy to the development said after a meeting today.

"The unionists present in the meeting demanded maintaining 9.5 per cent rate of return as given in 2010-11 and pointed out inaccuracies in income projection for this fiscal by EPFO officials," the source added.

Now FIC's recommendations would be tabled before the Employees' Provident Fund Organisation's (EPFO) apex decision making body, the Central Board of Trustees' (CBT), headed by labour minister for taking a final call on the issue in its meeting scheduled tomorrow.

The source said the employees' representatives in the FIC meeting sought clarification about the income estimation error which was Rs 458.73 crore.

They pointed out that when rate of return on over 85 per cent of the investment made by the EPFO is fixed, how could they calculate this amount on entire possible income of the body.

EPFO has reduced 2.5 per cent (Rs 458.73) crore as estimation error from estimated income of Rs 18,349.20 crore and projected an income of Rs 17,890.47 crore. The unionists are of the view that if this estimation error is factored in properly, then EPFO can spare around Rs 400 crore which is sufficient to pay additional 0.25 per cent over projected 8.25 per cent rate of return this fiscal.

According to estimates worked out the by the EPFO, the payment of 8.25 per cent of interest rate during 2011-12, will result in a deficit of a mere Rs 24 lakh.

It further pointed out that payment of 8.5 per cent rate of return to its subscribers will leave a deficit of Rs 526.44 crore.

The unionists, on their part, also raised the issue of interest income on the inoperative accounts on which EPFO has stopped paying interest rate from April 1, 2011, to the subscribers.

Inoperative accounts are those account which have not received any contribution for 36 months or more. There is about Rs 15,000 crore lying in those account, which was also invested and was yielding some returns, it was pointed out.

However EPFO was not clear on the issue whether the income on these inoperative accounts would be distributed among live accounts or kept as reserves when unionist asked their stand on the issue.

Source: Financial Express