The Employees’ Provident Fund Organisation (EPFO) has reportedly recommended an interest rate of 8.95% for the current financial year, up from 8.75% in the previous year. If the proposal is accepted, the Provident Fund will earn equivalent to 12.95% from a bank deposit or bond for subscribers in the highest 30.9% tax bracket (annual taxable income of Rs 10 lakh and above).
Over five crore subscribers have roughly Rs 8.75 lakh crore invested in the Provident Fund. The recommendation to hike the interest rate will have to be endorsed by the Central Board of Trustees before it is notified by the Finance Ministry. According to a report in The Times of India, if the proposal goes through, it will be the highest return on the Provident Fund since the 9.5% paid in 2010-11 and the highest ever real interest rate (offered rate minus inflation) in recent years.
Curiously, the hike in the interest rate comes in a year when the EPFO has shed its historical aversion to equities and put money in the stock markets. In August 2015, it invested Rs 5,000 crore in the Nifty ETFs managed by the SBI Mutual Fund. The Nifty has fallen nearly 14% since the EPFO’s tentative foray into the stock markets.
The hike is a bonanza for those with a large PF balance and those putting additional amount in the Voluntary Provident Fund. Experts reckon that the promise of a higher rate and the prevailing uncertainty in the stock markets might lead to a huge inflow to the VPF. However, investors should keep in mind that the higher rate is for the current year. The next year’s rate will depend on the returns earned by the PF corpus. On the other hand, the coupon rate offered on tax-free bonds stays fixed for the entire term.
Even so, the VPF is certainly a better bet than fixed deposits, bonds and small savings schemes. Keep in mind that the government plans to reduce the interest rates on small savings schemes, including the PPF and NSCs.