There is some good news incoming for Employee Provident Fund (EPF) subscribers. Your provident fund savings may soon earn a more predictable interest rate as the government is planning to cushion EPFO members from market fluctuations. The Employees’ Provident Fund Organisation (EPFO) is currently planning to create an ‘Interest Stabilisation Reserve Fund’ which may give its 65 million EPF members consistent returns.
According to a report by the Economics Times, the Labour and Employment Ministry has launched an internal study to assess how this fund could work. If implemented, such a move will provide EPFO subscribers with a secure cushion against fluctuating interest rates that currently depend on market-linked returns.
How Would This Work?
To generate returns on your PF contributions, EPFO invests the funds in a range of instruments such as stocks via exchange-traded funds (ETs), government securities, and corporate bonds.
The interest paid to EPF subscribers each year is dependent on the returns EPFO generated from these investments. However, market volatility means that the interest you get on your PF contributions can fluctuate significantly.
Under this proposed change, EPFO would set aside surplus interest earnings in profitable years to build a ‘reserve fund’. This reserve would then be used in lean years to maintain a stable interest rate, preventing any sudden drops due to poor market performance.
Such a fund would ensure that EPF subscribers continue to receive a more predictable return on their savings without fearing any sharp cuts or sudden hikes - both of which depend on investment performance.
The ET report quotes a government official who describes this move as a way to ‘shield subscribers from the market fluctuations’ and offer more stability in their retirement savings.
The proposal is still in the early stages. The EPFO’s highest decision-making body, the Central Board of Trustees, led by the labour minister, is expected to deliberate on the matter. If approved, the new system could come into effect by the financial year 2026-27, the report states.
Here are EPFO Interest Trends over the years;
EPFO’s interest rates have seen a rollercoaster ride over the decades. From 3 per cent in 1952-53, they steadily climbed to 12 per cent by 1989-90, where they remained until 2000-01.
After that, rates started to decline, hitting 9.5 per cent in 2001-02, 8.5 per cent in 2005-06, and reaching their lowest at 8.1 per cent in 2021-22.
For 2023-24, the interest rate was set at 8.25 per cent, and reports indicate that EPFO is likely to maintain this rate for 2024-25 as well. A decision is expected at the upcoming February 28 meeting of the Central Board of Trustees.
