By Priyanka Sambhav
Huge premature withdrawals, declining interest on the deposit and to top it all negative return in its equity portfolio has forced EPFO to split the interest into two instalments. The interest of 8.50% for the FY 2019-20 will be rolled out in a staggered manner. First, you will receive 8.15% of the interest and then the rest 0.35% will be credited in December.
Around 10.4 million salaried employees dipped into there retirement fund and withdrew money for surviving the Coronvirus lockdown. Labour ministry informed the Lok Sabha that a massive amount of 39,400 crores was taken out of EPFO between 25th March to 31st August 2020. 55% of this withdrawal was on the ground of COVID-19 window offered by the government. So if we let go of this 55% then also around 45% withdrawal was for meeting illness expenses, children education or for buying daal roti.
Those who did not withdraw this PF money and chose to be invested will now see a declining trend of interest on EPF. Around 6 crore subscriber were anyway raising their concern regarding the delay in the interest payment of EPF and now comes the news that you will have to wait a bit longer for the entire interest amount. This is for the first time that interest will be paid in instalment.
FY 2018-19 fetch interest of 8.65% on PF. But this dropped to 8.50% in FY 2019-20. For the time being you will have to settle with just 8.15% portion of the promised interest. Some PF subscriber are taking a sigh of relief as given the delay in crediting the interest was worrying so at least the process has started
Until the full interest is paid this 8.15% is the lowest interest that PF holders have got since 1977-78. The interest on PF in FY 1977-78 was 8% and since that year EPF interest never dropped beyond 8.15%.
Why the interest has been split?
The 0.35% of interest which will be credited later is the equity-linked investment part. EPFO in 2015 decided to put 5% in equities through exchange-traded funds (ETF’s) and now they invest around 15% in ETF’s. Given the ups and downs of the market, EPFO saw a setback of -8.3% on their investment of 1 lakh crore. So the retirement fund body will be making only a part payment of interest which amounts to 58,000 crores and the 0.35% portion which is around 2700crore will be paid later.
EPFO’s press release says that 0.35% will be paid ‘subject to redemption’. So does this mean that if redemption is not favourable then this amount may vary? EPFO board member & Bhartiya Mazdoor Sangh’s General Secretay Brijesh Upadhyay say ‘ These are extraordinary times. But PF subscriber need not worry at all. The promise of 8.5% interest will be met’
Personal Finance experts feel that getting interest in two-part may not be good news but at least interest is not slashed.
Hemant Rustagi of Wise Invest Advisor says ‘ Considering that a certain percentage is invested in equities PF subscribers should take this kind of variation/postponement in interest payment in their stride as they are likely to get a higher average return over the longer term’
Pankaj Mathpal of Optima Money Manager is showing us the silver lining- ‘ As compared to other saving schemes, FD’s or even the bank interest, PF’s 8.5% interest is still one of the highest return giver instrument during COVID’ Though he agrees that there could be a delay but he assures that full interest of 8.5% will be paid.
