No Rate Cut: EPF Rate unchanged at 8.50% for FY2021

If you are an EPF subscriber, you would want to know that What is the EPF interest rate for 2020 21?

The answer is here now.

In a relief to crores of employees, there has been no interest rate reduction in EPF (Employees Provident Fund). The rates have been maintained at 8.50% for FY2021. This is the same rate as that in the last financial year FY2020.

So the answer to your questions about What is current EPF interest rate? is 8.50%.

Once the new EPF interest rate is officially notified in the government gazette, EPFO is expected to credit the interest amount into the subscribers’ accounts.

For a historical perspective and how EPF interest rates have changed over the years, do check historical EPF interest rates (since 1952-53).

There were some concerns that given the strained finances of the government and the low-interest-rate environment, the EPFO might decide to reduce the interest rate. But this did not happen. Inspite of the higher withdrawals and lower contributions during the pandemic year 2020, EPFO decided to keep the rates unchanged at 8.5%, much to the relief of about 6 crore EPF subscribers. How were authorities able to do this in a falling rate scenario? I will get to it in a bit.

 When compared to other debt instruments, EPF is the one with a higher interest rate. And this high-interest rate of EPF along with the whole process of compounding that takes place for EPF account (as these are fairly illiquid) makes them a solid part of everyone’s retirement portfolio.

EPFO is known to follow a conservative approach towards investment as the prime goal is safety/preservation of the principal and also because this actually investing common man’s retirement savings. But nevertheless, the approach is gradually accommodating more equity to enhance returns as interest rates fall across the board.

Since the last few years, EPFO has started investing in equity through Nifty50 and Sensex based ETFs. What started as a 5% investment in equity in 2015-16 has gradually gone up slowly to 15% of the incremental portfolio being invested. And it is for this very reason that EPFO was able to provide an unexpectedly high return of 8.5% to its subscribers. During FY 2021, EPFO decided to “liquidate investment in equities and the interest rate recommended is a result of combined income from interest received from debt investment as well as income realized from equity investment.” And this has “allowed EPFO to provide higher returns to its subscribers while still maintaining a healthy surplus to act as cushion for providing higher return in future. There is no overdraw on EPFO corpus due to this income distribution.”

By the way, EPF is not exactly a Exempt-Exempt-Exempt investment option now. At least not for those who contribute above Rs 2.5 lakh a year. The government has announced that from 2021 onwards, interest on EPF contributions above Rs 2.5 lakh will be taxed.

Many HNIs were using EPF to get crores in tax-free interest income (read Top 20 HNIs have Rs 825 crore in EPF!). So the government decided to curb this practice by introducing taxation of interest above a given threshold of annual contributions.

By the way, do you know how EPF interest is calculated?

While the EPF contribution is (taken from salary and) deposited every month, the interest is calculated only once at the end of the year. EPFO calculates the monthly closing balance every month and then the interest is calculated. The interest is calculated by multiplying the monthly balance with the applicable EPF interest rates.

Further related readings:

EPF rates remaining unchanged and kept at 8.5% is welcome news for the subscribers of the Employees Provident Fund (EPF) even in this falling interest rate scenario. The sovereign-backed assured fixed guaranteed returns of EPF (along with favourable tax treatment) make it an attractive choice for investors and also doubles up as a solid tool for social security in India.

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