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The Employees' Provident Fund Organisation (EPFO) had provided 9.5 per cent interest rate to its subscribers for 2010-11 after it found Rs 1,731 crore surplus in its books of account.
"The Labour Ministry will soon be sending a note to the Finance Ministry, recommending 8.6 per cent rate of interest on provident fund deposits to EPFO subscribers for this fiscal as provided under PPF scheme", a source privy to the development said.
The source said the ministry wants bring the EPFO's rate of return on par with the PPF rate.
According to the EPFO's income projections, if the body provides 8.25 per cent interest for 2011-12, it would leave a deficit of a Rs 24 lakh.It had further pointed out that an 8.5 per cent rate of return would translate into a deficit of Rs 526.44 crore.
But, the Labour Ministry may factor in estimation error, which could spare around Rs 400 crore. This amount would be sufficient to pay an additional 0.25 per cent over the projected 8.25 per cent rate of return this fiscal.
Moreover, the source said that about Rs 15,000 crore is lying in inoperative accounts which has been invested and is yielding returns. EPFO has not yet decided whether the return on these accounts would be distributed among live accounts.
Inoperative accounts are those accounts that have not received any contribution for 36 months or more. EPFO had stopped payment of interest to such accounts from April 1, 2011.
Last month, EPFO's trustees had failed to decide on the interest rate for the current fiscal following sharp differences among them on the issue and had sought the Finance Ministry's intervention.
While the EPFO had suggested payment of interest at the rate of 8.25 per cent for 2011-12, the trade union members insisted it should be 9.5 per cent.
The representatives of employers wanted the interest rate to be fixed at 8.5 per cent.
The EPFO's apex decision making body, Central Board of Trustee (CBT), had sent the three scenarios to Labour Ministry for further recommendation to the Finance Ministry.
As per the practice, the CBT takes final call on the issue and seeks Finance Ministry's concurrence on it.
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My comments are as under: 1)The Central Board of Trustees of Employees Provident Fund Organization (EPFO) and the Union Labour ministry were responsible for insisting on paying an interest rate of 9.5% for the year 2010-11. (2) Although that was not a wise decision, it was made possible by using (non-existing) 'hidden' reserves of the EPFO. It is obviously not possible to do this type of accounting adjustment every year; the EPFO must earn interest to pay it to its members. (3) In this connection it is worth noting that most of the funds of EPFO are invested in a special deposit scheme of the Central government which carries interest rate of 8 % at present. If EPFO has to pay higher interest to its members it should earn more than 8 %. (4) This would be possible only if the Finance Ministry is ready to pay more on the special deposit scheme. Hence, in order to avoid the controversy about the fixation of interest rate every year, the most logical thing to do for the Finance Ministry is to fix rate of interest which is in tune with the current and long term rates of inflation. (5) As regards the interest rate for the year 2011-12, rate now being considered (8.6%) appears to be a viable rate. (6) It is hoped that the both Labour and Finance Ministries do not take any populist and unwise decisions in future.