POSTED BY September 19, 2010 COMMENTS (111)ON
On 15 September 2010, the Employees’ Provident Fund Organisation (EPFO) raised the interest rate for EPF accounts by 1% for 2010-11. The organisation increased the interest rate to 9.5% for 2010-11 from 8.5% in the previous year. This 9.5% is the highest in the last five years. However, one needs to understand that the 1% increase is only for EPF accounts and not for Public Provident Fund (PPF) accounts. A PPF account interest rate will continue to remain 8%. The EPFO is one of the largest provident fund institutions in the world. An EPF is a retirement benefit provided only to the salaried class. Each month, a small amount of money is deducted from an employee’s salary which is invested in his EPF account. The employer also contributes an equal amount.
“EPF becomes the best debt instrument” is surely good news from return point of view. But, the 9.5% interest rate may not be for long-term. The 1% increase in the EPF has happened because the EPFO has Rs 1,700 crore of surplus money lying in the interest suspense account. Suspense account is the account which has all the unclaimed PF money.
Note that all the companies do not contribute to EPFO-managed EPF, but they manage their employees provident funds through their own trusts, Now they will have to match this 9.5% interest and it would be a tough thing to achieve . Most probably , a lot of trusts are going to appeal to the finance ministry, that this 9.5% interest rate proposal is taken back , but it looks unlikely to happen (Read more)
An EPF is a long-term investment which salaried individuals have. Hence, some amount of it can be invested in long-term equity instruments. According to the finance ministry, some amount of EPF can be invested in the stock market. But, the central board of trustees (CBT) don’t agree with the same. The CBT has decided not to invest in the stock market. The labour minister Mallikarjun Kharge, who also heads CBT, says, “We had received a letter from the finance ministry asking for parking of a portion of EPFO funds in the stock market. We have received huge opposition from CBT members who oppose the idea of investing in stock markets.” As of now, the EPFO maintains a huge corpus of approximately Rs 3 lakh crore.
Earlier, employees would just leave their jobs but, their EPF accounts would earn interest. However currently, that’s not the case. Now, the accounts, which are not operated for the last three years, will not earn interest. So make sure you either withdraw money from your EPF account or maintain the account. According to EPFO estimates, there are a total of 47 million accounts, of which 30 million, which means 60%/around 57% are inactive accounts. Out of the 30 million inactive accounts, around 10 million accounts (that is 33%) have less than Rs 500 balance.
The EPFO mentions that maintaining inoperative account is quite expensive. Hence, the organisation has decided to stop crediting interest in all the inactive accounts which have not received contributions in the last three years. (Read this article.)
Comments ? What do you think about this move ?