The Telegraph
Since 1st March, 1999
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Finance refuses to sweeten PF rate pill

New Delhi, July 5: In a move that will hit provident fund savers’ bottomline, the finance ministry today decided to retain the interest payout on the special deposit scheme (SDS) at 8 per cent.

With 80 per cent of the Rs 128,000-crore employees’ provident fund being invested in the SDS, this makes the payment of current interest of 9.5 per cent on PF deposits untenable.

Last week, the board of trustees of the Employees’ Provident Fund Organisation (EPFO) had decided to defer a decision on reducing the PF payout rate in the hope that the finance minister would increase the interest rate on SDS under pressure from the Left.

The finance ministry has informed the labour ministry that it will be impossible to increase the rate of interest on PF deposits.

Last year, the earnings of the EPFO averaged 9.1 per cent as 20 per cent of the balanced funds were invested in schemes that offered higher returns. Taking into account the administrative costs, it would be pragmatic to reduce EPF payout to below 9 per cent.

However, Left leaders are expected to make a last-ditch effort by appealing over P. Chidambaram’s head to Prime Minister Manmohan Singh and United Progressive Alliance chairperson Sonia Gandhi.

It remains to be seen whether the Left lobbying will succeed. The other alternative for the board of trustees of the EPF would be to continue paying the high rate of return by dipping into the capital surplus of the fund — a move that could create a debacle on the scale that swamped Unit Trust of India in June 2001.

The Prime Minister had warned of just such an eventuality at a meeting with trade unions last month.

The finance ministry has long been urging the EPF trustees to offer lower rates on member accounts in line with the government and central bank’s policy of soft rates but they have been resisting moves to lower rates.

Last year, the trustees rejected a finance ministry proposal to cut the rates, saying the scheme would continue to offer a higher rate of 9.5 per cent because it had enough reserves and earnings.

The EPF interest rate ruled at 12 per cent till July 2000 when it was cut to 11 per cent. It was further trimmed to 9.5 per cent for 2001-02 and 2002-03.

For the year 2003-04, the central board of trustees cut the interest rate to 9 per cent, but gave a golden jubilee bonus of 0.5 per cent to retain the payout at 9.5 per cent.

The EPF Act mandates that any firm or establishment employing at least 20 people will have to be covered under the EPF scheme.

Any person drawing a basic salary of Rs 6,500 per month would have to contribute 12 per cent of the basic pay towards EPF while the employers contribute in the same proportion.

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