End of fluctuating PF interest rates? Check EPFO's big plan
What's the story
The Indian government is mulling the creation of an interest stabilization reserve fund under the Employees's Provident Fund Organisation (EPFO), as per The Economic Times. The move would ensure a stable rate of interest for more than 65 million subscribers, irrespective of the returns on investments made by the retirement fund body. The Labor and Employment Ministry has launched an internal study to formulate a plan for the proposed reserve fund.
Protection plan
EPFO's strategy to protect subscribers from investment fluctuations
As per the report, the EPFO wants to shield its subscribers from any fluctuations in the returns on its investments across various instruments, including exchange traded funds. Such a reserve would guarantee a uniform interest on their provident fund deposits. The excess from interest earned every year would go to this reserve fund, which could be used to keep a uniform interest rate during years when EPFO's interest income takes a hit.
Rate stability
Reserve fund to prevent disproportionate rate changes
The reserve fund would ensure that no disproportionate rate cut or hike in interest rate occurs due to unforeseen circumstances in the stock market. The plan is still in its nascent stage and could be finalized later this year. It could be implemented from the fiscal year 2026-27, after the central board of trustees of the EPFO, its highest decision-making body, approves it.
Rate history
Historical overview of EPFO's interest rates
The EPFO's interest rates have gradually increased from 3% in 1952-53, peaking at 12% in 1989-90. It was maintained until 2000-01, after which it sharply fell to 9.5% in 2001-02 and further dropped to 8.5% in 2005-06. It was again raised to 9.5% in 2010-11 but reduced to 8.25% the following year and reached a low of 8.1% in 2021-22. Notably, in February 2024, the EPFO increased the interest rate to 8.25% for FY24—the highest in three years.