After much wrangling, the Employees Provident Fund Organisation on Saturday decided to maintain the existing 8.5 per cent interest rate on provident fund deposits for 2009-10. This means that despite the lowering of bank interest rates, around 4.5 crore EPF depositors will continue to get a higher interest than the bank average.
The EPFO also deferred a decision on investing 15 per cent of its corpus in equity. "We would separately look into investing funds in stock markets. Naturally, safety and security is the most important and the returns also important for the employees. Looking at all these things we will decide," labour minister M Mallikarjun Kharge told reporters after the meeting of the Central Board of Trustees, which controls the EPFO.
The EPFO is constrained by the finance ministry's investment guidelines issued in 2008, which limit the fund's exposure to bonds of public sector undertakings to 40 per cent. PSU bonds fetch the highest rate of return among all categories of securities that the fund is allowed to invest in.
This is the fifth continuous year that the EPFO has kept the rate at 8.5 per cent. The decision by EPFO will now be sent to the union finance ministry for ratification.
The decision to retain a higher rate of interest should please salaried employees, as banks offer lower returns on deposits. However, it is widely acknowledged by economists that the current interest rate and investment regimes are unviable, especially in the current economic environment.
The Central Board of Trustees, which decides EPFO policy may, however, recommend imparting flexibility to the fund by allowing it to invest up to 55 per cent in PSU bonds from 40 per cent now.
The October 2008 guidelines of the finance ministry allow EPFO to invest up to 55 per cent in central and state government securities and government-guaranteed securities, up to 40 per cent in PSU bonds and up to 5 per cent in money market instruments - a new category introduced by the ministry.
Provident fund deposits in the country are estimated to be 1,82,000 core, and payments at the rate of 8.5 per cent will put a heavy burden on the exchequer.