EPFO Interest Rates – Real Decline Or Contextual Disconnect?

For the Employees Provident Fund Organization (EPFO), it is the time of the year to be in the headlines. As with each year, with the announcement of the applicable interest rate on PF deposits, there is consternation this year as well at the rates announced.

However, it is worth considering that in the past few years, there has been a substantive change in the retirement-focused savings ecosystem as the government has on the one hand sought to reform the functioning of the EPFO while on the other hand has promoted the National Pension Scheme (NPS) to bring in a more agile structure with private players in the game. 

While the verdict on the reform of EPFO functionaries themselves remains hung, the organization itself has had to embrace transparency via technology making things substantially easier in most cases. However, it is in the cases that are not-so-straightforward is where the difficulties still persist despite the “on record” protestations of the powers that be. However, these will only go away when the long-awaited (but unlikely on the horizon) bureaucratic reforms finally arrive.

India has had one of the most protective social security systems globally amongst large economies via the EPFO. We have had rates north of 10 per cent for the longest period, but those were in vogue nearly two decades ago. While steadily persisting in the 8-9 per cent range now for nearly twenty years, the rates this year are pushing the lower end of that range at 8.10 per cent. And that steady decline – though secular across ruling dispensations – has always seen criticism coloured by political lenses, nevertheless. 

However, when looked at in terms of the avowed goal of unloading the weight of managing retirals for the vast ocean of government employees along with that of the now much larger private workforce, the numbers seem to be poised in the right direction. 

However, as we look at those numbers it may also be equally important to see them in comparison with other offerings in the market. The table below is quite illustrative: 

Scheme/funds and their interest rates	2017-18	2018-19	2019-20	2020-21	2021-22
EPFO	8.55	8.65	8.50	8.50	8.10
Term Deposit Rate >1 Year (Five Major Banks)	6.40-6.75	6.25-7.25	5.00-6.40	4.90-5.50	4.90-5.50
5 Year Senior Citizens Savings Scheme	8.33	8.50	8.63	7.4	7.4
5 Year Monthly Income Account	7.48	7.50	7.63	6.60	6.60
5 Year National Savings Certificate	7.78	7.80	7.93	6.80	6.80
Public Provident Fund	7.78	7.80	7.93	7.10	7.10
Sukanya Samriddhi Account Scheme	8.28	8.30	8.43	7.60	7.60
Kisan Vikas Patra	7.53	7.50	7.63	6.90	6.90
General Provident Fund (GPF)	7.78	7.80	7.93	7.10	7.10

It is fairly clear that while the EPFO rates have seen a decline, the offerings from the organization still stand at the top of the heap – along with the security offered by government backing. And while the point does come across amply from the table, a graphical view gives further clarity to the insight: 

It is also equally important to understand the approach here. Para 60 (4) of the EPF scheme states that “in determining the rate of interest, the Central Government shall satisfy itself that there is no overdraw on the Interest Account as a result of debit thereto of the interest credited to the accounts of members”. 

Therefore, the EPFO does not dig and do ODs to enhance ROI.  The process of arriving rate of interest is a standard one and the same as what has been used in past many years. Due to very prudent investment policies, the EPF Trust Fund has been able to earn better returns than many and distribute the income to the PF members. The government also supports the PF corpus through sovereign guaranteed instruments like G Sec. The G Sec corpus as of 31 January 2022 is Rs. 6.43 lakh crores. 

Thus, when seeing the numbers one must go beyond the absolute and focus on the nuances of context which will no doubt save us from the annual ritual of berating the EPFO and the government over what is a result of a structured and consistent policy and approach. 

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