Source : https://economictimes.indiatimes.com | By Narendra Nathan
The central board of trustees (CBT) of employee provident fund organisation (EPFO) has decided to reduce the interest further to 8.55% for the financial year 2017-18. Interest rate for 2016-17 was 8.65% and interest rate for 2015-16 was 8.8%. EPFO said that there will be a surplus of Rs 586 crore even after distributing this 8.55% interest. This new rate is only a proposal and the same needs to be approved by finance ministry and notified to become final. Though there were instances of finance ministry reducing rates proposed by CBT, let us assume that this rate will be approved by finance ministry.
Most EPF subscribers are angry at the rate reduction. However, some are also happy. They say that despite this reduction, offered rate of 8.55% is significantly higher than the returns offered by other instruments like public provident fund (PPF), etc. The prevailing yield on 10-year government paper is also lower than this. How is EPFO able to fix rates higher than market rates? It is because of the accounting policy they use. While all other investment managers do ‘mark to market accounting’ (also known as net asset value (NAV) based accounting), EPFO still follows the ‘accrual accounting’. In other words, EPFO is valuing all investments, including its holding in equity ETFs, at cost.
And this 8.55% interest for 2017-18 is only based on the actual interest earned or ‘profit booked’ during the year. EPFO usually hold debt papers till maturity and rarely sells them. That means booked capital gains from that segment is practically zero.
However, EPFO sold around Rs 3,700 crore worth of equity ETFs during the year and realised a gain of around ?1,100 crore. The same is also used for giving this 8.55% return.