[The EPFO has increased the interest rate just .05%. It is 8.8% for the financial year 2015-16. The post has become irrelevant now]
Your retirement corpus, Employee Provident Fund may earn higher interest rate this year. There is a greater chance of EPF interest rate rise. The government can increase the interest rate on EPF from 8.75% to 8.95%. Whereas, there are talks about the reducing the interest rate on post office saving schemes. The government also decides the interest rate of post office saving schemes.
The finance and investment panel of the EPFO has already recommended an increase in the interest rate. But the government is in a dilemma. Because banks are pressurizing to reduce the interest rate of small saving schemes. Banks want to keep their deposit rates competitive to the government saving schemes. After the reduction of deposit rates, the banks would be able to reduce the interest rates on the loan.
On the other hand, EPFO is going to earn higher amount this year. It would have a surplus of Rs 868 crore. Using this surplus, the EPFO can give an extra interest of 0.2%. Even after this increase, the EPFO would have a surplus of Rs 91 Crore.
EPFO ‘s Interest Balance |
|
| Interest Rate (%) | Surplus/Deficit (Rs Crore) |
| 8.50 | 1,836 |
| 8.60 | 1,450 |
| 8.75 | 868 |
| 8.80 | 673 |
| 8.85 | 479 |
| 8.90 | 285 |
| 8.95 | 91 |
| 9 | -102 |
Now the union labour minister Bandaru Dattatreya would take a final call in February 2016. There is a probability of higher interest rate on EPF. If, for any reason, the interest rate does not rise, you can be assured of the current 8.75% for this financial year.
Except, EPFO all other interest rates would definitely decline. The inflation rate is down and there is a pressure to give cheaper loans.
How EPFO Decides the Interest Rate
EPF interest rate is not fixed at the beginning of each financial year. Rather, EPFO gives interest according to the earned profit.
EPFO invests almost all of its corpus in government securities. Since government securities give a fixed return, the EPFO almost know the overall profit at the end of the financial year. From this profit, EPFO deducts its own expense. The remaining profit is considered for the equitable distribution among all the EPF members. To make it simple, EPFO reaches at an interest rate.
Due to this mechanism, the interest rate of EPF is declared for the outgoing financial year. So, if there would be an increase in the interest rate, it would be for 2015-16.
EPF Interest Rate VS Other Saving Scheme
Interest Rate of Government Schemes |
|
| Saving Instrument | Interest Rate (%) |
| Employee Provident Fund | 8.75 (Proposed – 8.95) |
| Public Provident Fund | 8.7 |
| National Saving Certificate | 8.5 |
| Senior Citizen Saving Scheme | 9.3 |
| Sukanya Samriddhi Account | 9.20 |
| Kisan Vikas Patra | 9.20 |
| Saving account | 4.0 |
What Should be Your Step
The new interest rate of EPF does not give a guarantee for next financial year. But, you get an indication that EPFO can earn good returns. The return from EPFO is tax-free thus your real return would be higher.
Meanwhile, EPFO has started to invest in the stock market as well. It has invested 5% of new contribution into the share market. EPFO is treading very cautiously into the share market. However, share market can further increase the interest from EPF.
If EPF starts giving a good return, you can increase your contribution to the EPF. Currently, 12% of the salary is mandatory for EPF contribution. But, you can increase this contribution up to the total basic pay. By increasing the PF contribution, you can accumulate a bigger corpus for the retirement.
It is also necessary that you transfer you PF balance from the old PF account to new account. The UAN has made EPF transfer and EPF withdrawal very easy. Keep faith on EPF because it is a time-tested retirement scheme.