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Provident Fund Rate Slashed To 8.25%

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In one of the sharpest-ever interest rate reduction, the Employees Provident Fund Organization (EPFO) has slashed the return on statutory savings to 8.25 per cent for the current fiscal from 9.5 per cent last year, on cues from finance minister Pranab Mukherjee.

A notification for the reduction in rates for 4.72 crore EPFO subscribers was issued earlier this week, and comes days before the general Budget. In the present structure, the returns will be lower than the 8.6 per cent paid under for public provident fund (PPF) deposits, a popular voluntary savings scheme.

Banks too are offering 9%-9.5% deposits of much shorter duration. But compared to banks, returns on EPF are better since the annual contribution and the interest on the balance are tax free.

At a meeting of the Central Board of Trustees last December, employee unions had demanded that the EPFO maintain the interest rate at 9.5 per cent during the current fiscal, although based on funds available the government entity had proposed 8.25 per cent payout.

EPFO's investment committee had said that even at 8.25 per cent, there would be a deficit of Rs 24 lakh. But as has been the case in the past, EPFO is learnt to have spotted an unaccounted Rs 400 crore that it believes will help it push for higher interest rate.

Given the protests, representatives of employers who are on the board had suggested that 8.5% could be paid this year. The labour ministry had suggested payment of 8.6 per cent, in line with the PPF returns, while asking the finance ministry to take the final call.

It was for the first time that North Block was asked to decide instead of the usual practice of finance ministry notifying the rate suggested by EPFO. The ministry, however, went with EPFO's calculations in notifying the 8.25% return.

Following the finance ministry order, EPFO has asked its field offices to make the payments for the year. While employee unions are expected to protest the move, union representatives on the EPFO board acknowledge that a higher payment may be difficult since the law restricts the government or any outside agency from chipping in with resources for a bailout.