Govt Cuts EPF Rate From 8.5% To 8.1%; What Should You Do Now?

The Employees Provident Fund Organization or EPFO has reduced the interest rate offered in the PF scheme from 8.5% to 8.1% for the fiscal year 2022-23. The salaried employee class is going to receive lower interest from now onwards as compared to the previous fiscal year. The cut in the rate has made the interest payment to be the lowest in the last 43 years.

The decision was taken by the apex decision-making body of EPFO, the Central Board of Trustees (CBT). The government has also now approved 8.1% rate of interest on EPF deposits for 2022-23,  for about five crore subscribers of retirement fund body. This is the second time since 1977-78 that the interest rate has come close to 8%.

Reasons Behind the EPF Interest Rate Cut

As per the officials from the CBT, the interest rate offered in PF is determined by the earnings made by the organization. The year 2023 has already been a very difficult year for the financial market. With the Russia-Ukraine war, rising global inflation, interest rate cuts in the US and other European countries, the global markets have delivered very poor results. 

KE Raghunathan, a CBT member said, "The interest rate was fixed based on the earnings. It's a difficult year. Other than earnings from debt, we managed to get some corpus from ETF sale before the Ukraine war, which gave us some cushion. The corpus has gone up 13 percent but the interest income is up only 8 percent" He further said that EPFO has to make investments with extreme caution as the equity market is not performing well. "It is more important to have safety of investments than high return on investment," Raghunathan added further.

Another CBT member revealed that the employee representatives were demanding a higher interest rate but settled at 8.1%.

Impact On Your Retirement Fund:

With Rs 1.5 lakh invested annually at 8.1% annual interest rate, you can earn: Rs 23.8 lakh in 10 years, Rs 69.4 lakh in 20 years and Rs 1.73 crore in 30 years. However, if the EPF rate was still at 8.5% then you could have additionally earned: Rs 41.9k in 10 years, Rs 3.16 lakh in 20 years and Rs 13.2 lakh in 30 years period.  

EPF Interest Rate History

Here is the interest rate offered to the PF account holders in the past:

As said, the interest rate that is to be offered to the PF account holders is decided as per the earnings made by EPF. The EPF primarily earns from investing 85% of the collected funds in debt securities including government securities and bonds, and the remaining 15% is invested in equities through different ETF schemes. To pay interest in FY 2022-23, the organization will use around Rs 5,529 crore of the capital gains earned and Rs 12,785 crore proceeds made from selling ETF units.

What should you do now?

• The current 8.1% annual rate of interest is among the highest interest rates offered among safest fixed income investment products such as PPF, RBI savings bonds and Bank Fixed Deposits.
• You can contribute upto Rs. 2.5 Lakh per year tax-free through EPF + Voluntary Provident Fund route. The interest rate on VPF is the same as that of EPF.
• This means that your VPF contribution will also earn 8.1%, which is tax exempt up to Rs 2.5 lakh total contribution (EPF and VPF taken together) in a given financial year.

Learn how to add e-nomination to your EPF account.