If you depend on your employees’ provident fund (EPF) account for retirement needs, you may get frustrated with the returns this financial year. However, new measures such as the three-month PF withdrawal facility and EPF contribution reductions in the wake of the Kovid-19 pandemic will add cash to the hands of PF account holders during the ongoing crisis, but at the same time will affect returns in this financial year. Despite the decline in interest rates in fixed deposits and small savings schemes, the Employees Provident Fund Organization (EPFO) had declared an interest rate of 8.5% for 2019-20. There are 3 big factors that can affect your EPF returns.
1) Reduction in statutory EPF contribution for 3 months
The government has announced to reduce the requirement of statutory EPF contribution from 20% of basic salary and dearness allowance (12% of employees and 12% of employers) for the next three months. As a result, the money coming into your hand as salary will increase. Reducing contribution to EPFO will also affect the retirement corpus. In such a situation, experts say that this deduction will reduce the benefits to the salaried class and reduce the losses. Saraswati Kasturirangan, partner at Deloitte India, said, “Interest accrues to the member’s account on the monthly balance. After the contribution is reduced for 3 months, the monthly balance will be lower to that extent and the interest rate will be lower.” .
2) Withdrawal of penalty for delay in EPF deposit
Due to the Corona crisis and the lockdown, the business is not yet normalized. In view of the lack of cash flow, EPFO has removed the penalty for delay in EPF deposits by employers. Harsh Jain, co-founder and COO of the online investment platform Grove, says fines ensure that contributions are deposited on time, making it easier for EPFO to manage the investments made by the fund.
Also read: PF deduction: answers to many questions arising in the mind of 4.3 crore employees
If the employer deposits PF contribution late then the amount of the deposit will be less affected like monthly balance and this will in turn be lower on the interest earned on the deposit. Kasturirangan said that this balance amount will not get the benefit of compounding, as the contribution was not given in time. The effect of this rebate will be known when it will be clear how many employers submit their contributions after 3 months.
3) The possibility of further decline in the interest rate of EPFO this year
Given the falling interest rate scenario in India now, the Reserve Bank of India (RBI) is regularly cutting policy rates. In such a situation, it will be difficult for the EPFO to maintain the 8.5% interest rate for this financial year. The Public Provident Fund (PPF) interest rate has been cut by 7.1%, while the interest rate on the National Savings Certificate (NSC) has been reduced by 110 bps to 6.8%.
Also read: Lockdown: PF claim is getting in 72 hours, settlement of 1 lakh 37 thousand claims in 10 days
Given the fact that the rate of return on various investments has declined, corporates with PF trusts will need to review whether earnings are sufficient to match the interest rates announced by the EPFO. Kasturirangan said, “We will also have to wait on whether the low rate of interest will be announced by the EPFO for FY 2020-21”.