The Employees’ Provident Fund Organisation (EPFO) has fixed a rate of return of 8.5% for the financial year 2008-09. This has implications for a lot of people and hence the details have to be analysed in order to understand the overall financial impact. There is not only an immediate impact in terms of earnings but also a long-term impact that will determine the amount that is built up as a corpus.

Application

The benefit of the 8.5% interest rate is applicable for all employees who are contributing money to the Employees’ Provident Fund (EPF). This will include those whose funds are managed in the central pool as well as those entities that run a separate trust for the management of the money. Several large companies run their own trust and they too will have to pay a minimum of 8.5% interest to their employees. This is a good return for the employees; every year there is a rate declared, which is applicable for that particular year. The rate can change from year to year, and the specific figure needs to be taken for a specific calculation.

Comparison

The rate announced is applicable to the balance that is standing in the name of the employees in the entire account. This means that if there is a person who has been working for 15 years, with a large amount accumulated in his/her provident fund account then the entire balance will earn the rate of return for the particular financial year. This is the reason why accumulation of the funds in the account over a number of years is beneficial because the amount will then continue to compound over a period of time.
If the rate of interest for the year is compared with the applicable rate prevalent in the economy then this is not very different from what is being witnessed. Till some time back, the rate for a one-year deposit has climbed to around 9.5%-10% but this has come down since then. Due to this reason, the applicable rate would be in the range of 8%-9%, depending upon the institution. In such a situation, earning 8.5% on the provident fund stands in a strong position as compared to the situation witnessed outside.
There was a demand for a higher rate of interest from the unions but the rate was not hiked from 8.5% that was witnessed last year. This is because the Fund has to consider its earnings while paying out the returns and there has to be adequate earnings present for the scheme to be able to afford the payments.

Retired Midway

All the employees who have retired midway through the financial year will not be impacted because they will have been paid interest for the year at 8.5%. Some addition or subtraction would be necessary only when the rate paid and the final rate declared are different and hence this situation does not arise for the retiring employees this year.

Future Impact

The important thing is that the employee should see not only the current year’s rate but also the expected rate in the future. This is because the investment is for a long term and the stability of the investment has to be witnessed for that long term. Currently, the Fund has virtually used up most of its reserves for the payment of the interest for the current financial year.
This means that there is not much left in the kitty for the Fund to dig up in case the times are tough and this can impact the rate of return that is earned in the future. If there is a tough year in terms of earnings for the Fund then there might have to be a lower payout because there will not be enough resources for a higher payout.
Past buildup of the reserves has helped the investors in the scheme pass through the tough times before, but this might not be possible in the next few years. In that sense, the expectation from this scheme also has to be considered by the individual because they might need to make additional savings and planning in order to get a certain sum of money for their retirement.