Increase in interest rate for PF deposits

Context

Recently, the Centre has accepted the recommendation of the Central Board of Trustees (CBT) of the Employees’ Provident Fund Organisation (EPFO) to increase the interest rate of deposits in Provident Fund (PF) to 8.15%.

About the information:

• The new rate will be applicable for financial year 2023-24.
• The CBT had recommended an increase to 15% from 8.10% interest to the deposits on March 28, 2023.

What is Employee Provident Fund (PF)?

• It is a government-established savings scheme for employees of the organised sector.
• The EPF interest rate is declared every year by the EPFO (Employees Provident Fund Organisation) which is a statutory body under the Employees’ Provident Fund Act, 1956.
• For the current financial year 2022-23, the interest rate on the EPF account has been fixed at 8.15%. Only employees of companies registered under the EPF Act can invest in the EPF or PF.

Employees’ Provident Fund Organisation (EPFO): EPFO is one of the World’s largest Social Security Organisations in terms of clientele and the volume of financial transactions undertaken. At present it maintains 24.77 crore accounts (Annual Report 2019-20) pertaining to its members. The central board of trustees which administers the EPFO runs three schemes – EPF Scheme 1952, Pension Scheme 1995(EPS) and Insurance Scheme 1976 (EDLI).

• Both the employer and employee are required to contribute 12% of the employee’s basic salary and dearness allowance every month to the EPF account.

Who regulates the Employee provident funds?

• The Employees’ Provident Fund Organisation (EPFO) is one of the two main social security organization under the Government of India’s Ministry of Labour and Employment and is responsible for regulation and management of provident funds in India, the other being Employees’ State Insurance.
• The interest rate was recommended by the Central Board of Trustees of the Employees’ Provident Fund Organisation (EPFO).

EPF vs. PPF: Public Provident Fund (PPF) is a government-supported savings scheme. It is open to everyone – employed, self-employed, unemployed, or even retired. It is not mandatory and anyone can contribute any amount to the PPF subject to a minimum of Rs 500 and a maximum of Rs 1.5 lakh per year. It has a fixed return which is set by the government every quarter. You can open a PPF account with the post office or most major banks. The PPF interest rate is reviewed every quarter. The current PPF interest rate is 7.1%.

Drawbacks of EPF:

• EPF is only open to employees of companies that have registered under the EPF Act.
• This means companies with 20 workers or more. It is not available to self-employed or retired individuals.
• The EPF contribution is rigid and fixed at 12% of salary and DA from the employer and employee.
• You cannot contribute less than this amount, although you can contribute more to VPF (Voluntary Provident Fund)
• Withdrawal before 5 years from account opening of EPF is taxable. In the modern economy, many people cannot keep a job in an EPF-registered company for 5 years.
• The EPF rate may not match the long term returns of Mutual Funds or the National Pension System (NPS).